This paper uses a vector autoregression (VAR) approach to identify the causes of the recent deflation in China. The main finding is that the recent deflation was precipitated primarily by shocks to private investment and deepened mainly by the sharp decline of consumption. Monetary factors can explain the most part of the initial shock to private investment, while the decline of consumption was mainly caused by expectational factors. The results of impulse response analysis show that the consumption shocks have a long lasting impact on GDP and this can explain the relatively long duration of the recovery．