Microeconomic Efficiency and Macroeconomic Policy Effectiveness in China's Transformation Phase

In its economic transformation and microeconomic reform, China is using two‐tiered price systems. These combine an administrative and a free market element and can achieve Paretian optimality in supplies of products relative to resources allocated to enterprises. But complete allocative efficiency is not achieved because of poor resource allocation. The attainment of economic efficiency is particularly hampered by the absence of adequate capital markets. Furthermore the two‐tiered price system may distort the relative availability of capital to industries and thereby distort their comparative growth, and add to inflationary pressures. But the system has economic advantages in relation to monopolies.