Report | Macro Analysis

Special Report

Comparative Research on Potential Output (III)

20 September 2012

Key Data

% GDP 11 12E 9.2 7.81. There is variety of ways to estimate the potential output level. According to the CPI 5.4 2.7PPI

6.0 -1.9 Retail Sales

17.1 14.2 Industrial Added Value 13.9 10.1 Export 20.3 8.1Import 24.9 6.6 FAI 23.8 20.4M2

13.6 14.0RMB Loans

15.8 14.4

1 yr Deposit Rate 3.50 3.001 yr Lending Rate 6.56 6.002.RMB Exchange Rate

6.30 6.24

Latest Data (August)

Industrial Added Value 8.93.Urban Investment 20.2Retail Sales 13.2CPI 2.0PPI

-3.5

Source: CEIC, CMS(HK)

4.

Dr. David XIE

86-755-83295524

xieyx@cmschina.com.cn

Dr. Cliff ZHAO

852-31896126

wenlizhao@cmschina.com.cn

5.

Qing LI

852-31896142

qingli@cmschina.com.cn

production function method, the general factors that affect potential output include the amount of labor, capital inputs and total factor productivity. These affect the potential growth rate directly. We believe that the potential growth rate will not show a simple up or down trend in a medium to long term. Through changes in labor, capital and total factor productivity, there will be peaks and troughs for the potential output. Above is the core foundation of whether the policy intervention is effective to the potential growth rate.  

Government has the power to effect the potential growth trend through industrial upgrading, infrastructure improvement and various regulation establishment suited with economic development in short term.

Experience of Taiwan and Korea shows that for lagging economies to achieve the

economic catch-up, governments have played an important role. Because of the imperfection of market mechanism in these countries, it is difficult to achieve economic take-off relying on the market mechanism. In order to realize economic catch-up, the price-distorting policy is the inevitable choice of catching-up countries. These policies ensure Taiwan and South Korea a fast speed of capital accumulation which stimulate a quick boost of potential growth in short term and consequently lead to a successful economic takeoff.

Along with the perfection of market mechanism, the negative effects of government

intervention in the economy will gradually expand. Taiwan and South Korea implemented the financial liberalization policies represented by the economic liberalization, in order to gradually reduce the government control of economy. Reasons why Taiwan and South Korea received varying degrees of impacts in financial crisis are as follows: regardless of countries’ level of economic development, blind pursuit and imitation of financial structures of the developed countries are tantamount to spoil things by excessive enthusiasm, while ignoring the financial reform’s complexity.

For China, we should learn from the experience of Taiwan and South Korea. First,

under conditions of gradually improving market mechanism, the counter-cyclical economic intervention should respect the developmental rules of economies themselves, policy efforts must be appropriate to meet the needs of the economic situation. Second, financial reform should follow the steps gradually. The government should strengthen their role of regulators. Financial liberalization does not mean hands-off management.