A Multiple Indicators and Multiple Causes Model (MIMIC) is used to calculate the size of China’s underground economy size during 1979-2009, the results show that the increasing range of the proportion of China’s underground economy size to GDP is relatively large and reached 23.28 percent in 1990 and about 20 percent after 1992 in a relatively stable ratio but the relatively size is still on big side, that the chief factors affecting China’s underground economic activities include tax burden, unemployment rate and government control, that underground economy size proportion and governmental economic growth rate are reciprocal causality, and that underground economy has certain active action on governmental economy, however, the enlargement of underground economy size decreases the resources allocation efficiency and intensifies the income inequality among Chinese citizens at present stage. 