Some of the distinctive features of the organization of the Chinese economy are its diversity of ownership forms and the dual-track system of price formation. In Discussion Paper No. 1370, John Bennett and Huw Dixon develop a macroeconomic model designed to encapsulate these features. The model has three sectors: agriculture is distinguished from industry, and industry is divided into two sectors. The modelling of the agricultural (food) sector reflects Chinese practice in the production of grain, the most significant agricultural output. There is household production in this sector, with government restrictions on migration keeping the number of households fixed. The dual-track pricing system operates, whereby each producer agrees in advance to deliver a specified quantity to the state for a price greater than market-clearing; any excess output can be sold on the free market or consumed by the producer. Within industry, they distinguish the non-traded good sector from the export sector. The non-traded good sector is meant to represent the bulk of state-owned enterprises (SOEs) and some other Chinese firms characterized by disguised unemployment due to the lack of imported goods.

The authors use the model to analyse some of the macroeconomic policy tools employed by the Chinese government. Marginal prices clear markets except that currency controls constrain the availability of intermediates, the only imports. Devaluation is found to stimulate real variables, but deflate money variables; the reverse occurs with monetary expansion or raising the plan-track food procurement price. Lowering urban food subsidies or raising enterprise taxation reduces the budget deficit, reduces open and disguised unemployment, and deflates nominal prices.

A Macro-Theoretic Model of the Chinese Economy
John Bennett and Huw David Dixon