Abstract: With the evaluation of current study on the estimation of China’s potential output, this article estimates China’s potential output, output gap and the potential output growth rate between the year of 1978 and 2004 by H-P Filter and Production Function Approach. The result shows that: firstly, the output gap of China demonstrates the classical cycle that the fluctuation level alternates in a positive and negative way between 1978 and 2004; secondly, the output gap fluctuates dramatically and frequently before 1995 and smoothly after 1996 especially after 1999; thirdly, since 1997, though the economic growth rate has maintained a high level, the actual utilizing level of factors of production has been declining gradually; fourthly, the results of the Production Function Approach basically reflect the utilization of factors of production since the reform and opening-up during which China has transited its economic system from planned economy to market economy and established the market economy; fifthly, according to the potential output estimated separately by HP filter and production function approach, the average potential output rate from 1978 to 2004 is 9.54% and 9.67% respectively. Accordingly, it is a much better choice to stabilize the economic growth rate of China at the level of 8% or 9% through the appropriate macroeconomic control in the following years.