This paper investigates the institutional reason underlying the change in the trajectory of
economic growth in post-reform China, and argues that the trajectory of growth was
much more normal during the period of 1978-89 than in the post-1989 era. In the former
period, growth was largely induced by equality-generating institutional change in
agriculture and the emergence of non-state industrial sector. In the latter period, growth
was triggered by the acceleration of capital investments under authoritarian
decentralized hierarchy within self-contained regions. Such a growth trajectory
accelerates capital deepening, deteriorating total factor productivity and leads to rising
regional imbalance. This paper further argues that the change in the trajectory of growth
is the outcome of changes in political and inter-governmental fiscal institutions
following the 1989 political crisis.