To research the distortions of Chinese economy under a system of free markets, a computable general equilibrium model is constructed. And we will derive the model. The conclusions of the study are: (1) prices and resource allocation in the 1995 Chinese economy were substantially distorted; (2) labor was be overpaid and capital was underpaid in most non-agriculture sectors;(3) More the agricultural labor force would have been employed by the non-agricultural sectors had China been a market economy. (4) The elimination of these distortions would imply a significant improvement in allocation efficiency and a redistribution of income from labor to capital, from households to the state, and from urban households to rural households.