PRICE REFORM AND STRUCTURAL-CHANGE IN THE CHINESE ECONOMY - POLICY SIMULATIONS USING A CGE MODEL

Since the beginning of economic reform, China has made great strides in reforming the price system. However, the government has only recently begun to tackle reform in some heavily subsidized, bottleneck sectors like coal and crude oil. In this paper a computable general equilibrium (CGE) model of the Chinese economy is developed and used to examine the sectoral and economy-wide effects of price reform in these and other sectors. The model incorporates a number of important institutional features of the Chinese economy, including the two-tier plan/market price system, differences between state and non-state owned enterprises, and the limited mobility of factors of production. Simulations with the model provide estimates of the sectoral shifts in profits and other variables that result from increasing plan prices or reducing plan quota allocations. In most cases analyzed, price reform has the additional effect of increasing tax revenues and reducing the government budget deficit.