Understanding China: An Explanation for an Unusual Macroeconomy

China presents several macroeconomic patterns that appear inconsistent with standard stylized facts about economic development and hence inconsistent with the standard growth model. We show that Chinese macroeconomic patterns instead appear consistent with an objective of maximizing output in non-competitive factor markets. In short, China appears to successfully follow the stated output objectives in its …ve-year plans. We consider the micro-institutional features that can sustain this behavior and present a simple model built on these features. The model emphasizes the hukou system and state control over capital allocation, which allow a centralized output-maximizing objective to be e¤ectively decentralized into pro…t-maximizing …rms. The model can explain several puzzling facts about the Chinese economy while also showing how a shift toward a free-market system can initially take the economy further from global macroeconomic norms.