This paper assesses the progress of China’s transition toward a market economy by examining the structure of ownership, productivity, and profitability, as well as the concentration of production across firms, industries and regions. It does this by analyzing a database of firm microdata of the quarter of a million industrial companies in operation during the 1998–2003 period. Results show that the private sector now accounts for more than half of industrial output, compared with barely more than a quarter in 1998, and operates much more efficiently than the public sector. Higher productivity has fed through to profitability, motivating greater regional specialization of production. These changes are consistent with what would be expected in a market-based economy, and suggests that reforms are making rapid progress. This Working Paper relates to the 2005 OECD Economic Survey of China (www.oecd.org/eco/surveys/china).