China has undergone considerable economic change since the late 1970s, but economic interests and political conflict produced by reform have led to social dissatisfaction, despite an improved standard of living. Further market reforms may result in job losses within state-owned enterprises which will test both workers and political leaders. This analysis of the industrial-reform measures taken by the Chinese government between 1985 and 1995 seeks to identify the economic and political tensions and contradictions that state-enterprise reform has presented to a leadership intent on maintaining its authoritative political position. Using government sources, and interviews with economists and workers at one of China's largest state-owned enterprises (The Second Automobile Works), the author concludes that the relationship between state policy and enterprise is a complex two-way process characterized by tensions resulting from conflicting priorities.