Growth cycles and business cycles of the Chinese economy through the lens of the unobserved components model

Abstract We build upon the most recent development in the literature and estimate a comprehensive set of univariate and bivariate Unobserved Components models to study the varying long-run growth rate and output gap of the Chinese economy for the period of 1952–2017. We find that the long-run growth rate varied substantially, and thus the growth cycles played an important role in the Chinese economy. Specifically, the long run growth rate accelerated since the late 70s, peaked in the early 90s, and since then has continuously declined except for several years right after China's entrance into the WTO. We also find that although the recent 4-trillion-Yuan economic stimulus package helped to sustain the economic growth temporarily it appeared to have accelerated the decline of the long run growth rate. We also find that the potential growth rate is estimated to be slightly above 8% as in 2017, but the output gap has become negative since 2015 and this recession at the business cycle frequency continuously deepened until the end of the sample.