By Wu Zhenyu, the Department of Macroeconomic Research, the DRC

Research Report No 155, 2013

Abstract:

An economy's potential growth rate is determined by internal factors and external environment. The internal factors depend on the level of development and other related economic attributes. By separating the three factors, we can study the relationship between potential growth rate and the level of development with regional data and overcome the problems caused by insufficient data samples.

This report studies the quantitative relation between potential growth rate and development level by using historical data from Chinese provinces since 1994. It uses this information to forecast the potential growth rate in the next decade.

The analysis shows that the potential provincial growth rate would gradually decrease when per capita GDP reaches 8,000 yuan ($1,313.60), supposing the price is fixed. The average potential growth rate would approach 7 percent in the next 10 years, compared with the current growth rate of slightly higher than 8 percent. It is expected to reach its peak at 8.5 percent two years later and then decline quickly. China's potential growth rate would fall to around 5 percent in 2020.