It is observed that the business cycle in China has it own specific pattern. Comparing with
other countries, China exhibits moderate consumption volatility and acyclic trade balance. Existing
literature manages to answer some of the questions but don’t incorporate both firm dynamics and
the impact of SOEs. Motivated the persistent and dramatic SOE reform for the last thirty years, a
model includes vertical market structure, difference between SOEs and PEs and endogenized firm
dynamics is introduced, and still manage to account for the aforementioned features. It is found
that with both the endogenized market share and the firm’s entry and exit decision, the productivity
shock and credit shock account for most of the fluctuation in the Chines economy. This new result
comes from the fact that the productivity shock can affect the output through three channels:
production, markup and market share.