Modelling the post-reform Chinese Economy

Abstract

The system of dual-tier pricing developed in post-reform China includes an important role for secondary market prices in guiding resource allocation and stimulating adjustment. This paper draws on recent theoretical literature on dual-tier pricing systems to specify a computable general equilibrium model of the Chinese economy. Particular attention is paid to the foreign exchange system where the interaction of an overvalued official exchange rate, the foreign exchange retention scheme and secondary markets for foreign exchange affect the performance of the entire economy. Key results of an illustrative simulation experiment for devaluation of the official exchange rate are presented.