Morgan Stanley's July 25 bombshell report reveals alarming data: China's GDP deflator has been negative for 9 consecutive quarters, exceeding 2015 deflation levels. Unlike previous supply-side reforms, 50%-90% of current excess capacity is in emerging industries dominated by private enterprises, rendering traditional administrative tools ineffective. Report identifies root cause: distorted local incentive mechanisms and investment path dependency. True breakthrough requires fiscal system reconstruction, cadre evaluation reform, and consumption-led transformation. Among four policy pathways, optimal combination achieves sustainable reflation while worst scenario triggers deeper deflationary trap.