A computable general equilibrium model is constructed to simulate the Chinese economy under a system of free markets, and is estimated using a calibration procedure coupled with econometric estimation for key parameters. The equilibrium solution of the model indicates substantial distortions in prices and resource allocation in the 1983 Chinese economy. Labour was found to be overpaid and capital underpaid in most non-agricultural sectors. Two-fifths of the agricultural labour force would have been employed by the non-agricultural sectors had China been a market economy. The elimination of these distortions would imply a significant improvement in allocative efficiency and a redistribution of income from labour to capital, from households to the state, and from urban to rural households. China embarked upon its economic reform programme in the late 1970s. Over the period 1979-83 there were dramatic reforms in the rural agricultural sector, including the dismantling of the 'three-level' ownership of communes, the dis- tribution of land to peasant households and the relaxation of controls over labour transfer from the agricultural sector to the rural non-agricultural sector. In contrast, in the urban economy, and especially in the state industrial sector, reforms were confined to modest improvements in incentives for enterprises and workers, notably through the introduction of profit retention schemes and bonus systems. In 1983, much of the traditional mechanism of resource alloca- tion remained essentially intact. The problem of distortions in the price system and in resource allocation in centrally planned economies (CPEs) has long been a concern of economists, and there has been a considerable interest in empirical modelling of distortions in CPEs. Thornton (1971) estimated potential efficiency gains from equalizing the return to capital for different branches of Soviet industry in the early 1960s. Desai and Martin (1983) provided similar estimates using econometrically esti- mated production functions. Portes and Winter (1980) estimated excess demand in the aggregated consumption goods market for a number of pre- reform Eastern European economies using the technique of econometric dis- equilibrium modelling. Podkamine (1988) calculated free market demands and prices in the absence of rationing for consumption goods markets in Poland during 1965-86 by transplanting demand systems estimated for market econ- omies into the quantity-constrained Polish economy. Chow (1985) investigated the efficiency of labour allocation in Chinese state industry by comparing the average wage rate with the value of the marginal product of labour. All these studies, however, involve 'partial equilibrium analysis', in the sense that they are concerned only with examining the distortion in a specific market and therefore have tended to ignore distortions in the rest of the economy and a