China & World Economy  / 101–120, Vol. 21,  No. 4, 2013

Deregulation or Governmental Intervention?
A Counterfactual Perspective on China’s Electricity Market Reform

Sumei Chen, Lingyun He*

Abstract

The long-standing severe power shortage in China has provoked much debate on whether China should further promote market-oriented electricity reform. The present paper addresses this issue by analyzing the impacts of deregulation of the electricity generation sector and retailing activities on other sectors, the macroeconomy and electricity users. A counterfactual scenario analysis is used based on a simplified computable general equilibrium framework. We find that deregulation can significantly improve the efficiency of electricity production, increase employment and enhance household welfare. These nontrivial findings can help to resolve many controversies about governmental intervention during China’s economic transition. Our findings have two implications relating to policy feasibility and applicability; that is, competition in the electricity retail market should be phased in, and the necessary arrangements for unemployment in incumbent firms should be considered.

Key words: China, computable general equilibrium, deregulation, electricity industry, scenario analysis
JEL codes: C68, L43, L98