China’s Economic Reforms and Factor Price Dynamics

We study the economic reform process in China that began in 1978 using a quantitative model with endogenously determined factor price policy regimes. Using land as an example of factors of production, our model captures the following salient features of the reform process in China: the introduction of non-SOEs (state-owned enterprises) and reform of land market since 1980s, and the reform of SOEs which is characterized by the retreat of SOEs in the competitive manufacturing sector and the establishment of state monopoly in the factor market from late-1990s. Further, it generates a regime switch in the land price policy in China: from a dual-track pricing aimed at protecting inefficient SOEs to a discriminating policy that aimed at encouraging economic growth and raising land revenue from private households. In our framework the regime switch in the land price policy is endogenously determined by the relative productivity growth of the non-SOEs. We calibrate our model to match key economic data for China during 1978-2010. We find that our model can explain more than half of the increase in the land price disparity between industry use and commercial/residential use observed in China since 2000. We are also able to match several other stylized facts characterizing the Chinese economy: steep decline in labor share, rapid growth in housing price, and government expenditures on public goods and social benefits.

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