The Effects of Reforming the Chinese Dual-Track Price System

free-market price and the weighted average price (CPI). We consider how the mar-
ket price and the CPI change when plan-track policy variables (price and quantity)
are adjusted during the reform process. A message of the paper is that we need to
be careful in interpreting price or inflation data in transition economies because
the measured CPI does not always reflect ‘true’ prices.

We show that reform leads to a reduction in the free market price but an
increase in the CPI. An implication is that under a dual-track system inflation
can result from transitional policy or from market factors (demand and supply).
In China, when the market track was still relatively small compared to the plan
track, variation in the rate of inflation of the CPI was primarily caused by changes
of government policy through plan track prices and quantities; that is, the gov-
ernment still had a considerable influence over the economy through these fiscal
controls. However, as transitional policy shrinks the plan track, the government’s
ability to control over inflation diminishes, and insofar as it attempts to do so
through significant variation of the plan-track prices and quantities for commodi-
ties still in the dual-track system, considerable distortions in resource allocation
will result.

To allow for the possibility of resale, we consider two different types of house-
hold: state employees, who benefit from the plan-track subsidy, and the non-state
employees, all of whose purchases are at the market price. Under relatively mild

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