Dynamic CGE model of the Chinese Economy for Policy Analysis

China is predicted to be the largest economy in the world by 2020 according to the IMF forecasts. Annual growth rate of output that remained around 9.3 percent on average during 1980 to so15 period was made possible by the accumulation capital with steady flows of investment on average around 49.5 percent of GDP, increase in the human capital index from 1.8 to 2.6 in the country that has the largest population among all countries. Current account surplus stood around 3.4 percent of GDP. Macroeconomic stability mad such growth rate possible. • Market friendly growth strategy however has led to a sharp increase in the income and consumption inequality. Inequality is deeper in the rural areas than in the urban areas. A representative household in the richest quintile earns eight times more than an average household in poorest quintile. This is five times more in urban areas. The Gini coefficient is recently estimated to be around 0.48. By this measure China has become the most unequal economy in the world. Similar disparities remain across provinces of China; per capita income of Tianjin was 99,600 Yuan compared to 22,921 Yuan of Guizhou. The DCGE model constructed in the Hull University Business School has more than 20,800 variables to represent output, investment, capital accumulation, employment, relative prices, exports, imports, tax payments as well as to compute the level of welfare of households in the economy. This model is solved balancing demand and supply with continuous adjustment in the relative prices, investment and capital accumulation. The major parameters of the model include the elasticities of substitution in production, consumption and trade. It contains flexibility of markets in goods and services or over pricing or mark up behaviour of firms. This is truly a micro-founded macro model of the Chinese economy designed to explain growth and redistribution simultaneously. Cost of tax and transfer distortions across firms and households can be measured by simulating the model. Current version of model analysis is based on changes on taxes on capital and labour inputs. This model precisely measures the economy wide impacts of policy choices of the government (see results in excel files or power point slides). This model precisely measures the economy wide impacts of policy choices of the government (see results in excel files or power point slides). Model will be extended to analyse issues of pensions or social security and the aging society; consequences of debt accumulation in the public and private sectors; to explain the consequences of public policy choices of the central and local governments.