The Chinese Output Gap During the Reform Period 1978-2002

We estimate potential GDP for China comparing univariate and multivariate methods and derive a quarterly output gap series. For the multivariate, production function based estimates we employ aggregate data and data on five economic subsectors. We estimate production functions in levels as well as an EqCM specification, which we argue is better suited for identifying the long-run share of capital and labour in production. Our output gap estimates improve on earlier work which has so far been used in the emerging literature on macro-modelling of the Chinese economy. Drawing on the literature on Chinese economic growth, productivity measurement, and capital stock construction, we find that across a range of reasonable assumptions for capital and labour data specifications the output gap estimates remain correlated and robust. All our methods show that at the end of 2002 China is entering a period of economic upswing, but the current level of the output gap is much below the previous peaks in 1988/9 and 1994/5.