Tradable Goods Price Structure in China, 1978–95

At the onset of economic reforms, China’s domestic price structures had diverged substantially from that of the rest of the world owing to 30 years of central planning and isolation. These distortions had resulted in a huge loss of allocative efficiency for the Chinese economy and hindered the opening up of the domestic economy. It was clear that the domestic price system had to be reformed and realigned with the rest of the world. After nearly two decades of intensive economic reforms, by 1995, 89 per cent of consumer goods and 78 per cent of producer goods were being sold at market prices (Editorial Board of the PYC 1996). However, the impact of economic reform on China’s domestic price structure has not been subject to rigorous empirical scrutiny. Although the magnitude of China’s domestic price distortions can be indirectly measured using data on the sectoral profit rates of Chinese industries,1 few attempts have been made to directly quantify the changes in the differentials between China’s domestic prices and the world prices at a commodity level.2