Since the reform of 1978, China's overall economic performance has been remarkable. The average annual GDP growth rate reached 9.4% in 1978-2002. However, in the last few years, China's economic growth rate has been questioned. A deflation was evident at the end of 1997. In spite of the Chinese government's many efforts, the deflation has continued. A deflation in an economy in general is accompanied by stagnation or slow GDP growth. However, China's GDP growth rate reached 7.8% annually during the deflation period in 1998-2002, which was the fastest growth rate in the world. Moreover, the energy consumption dropped in 1998 and 1999. The abnormality prompted some economists to question the reliability of China's statistics. In the paper, the author will analyze why it was possible for China to maintain high growth with reduction of energy consumption during the deflation period and suggest the way for China to absorb excess capacity and get out of the deflation. The author will also discuss the prospect for China's long-term growth.