Central-local relations are a core but problematic issue in China's reform process. The conventional wisdom is that the economic reforms have considerably weakened control by the central government over economic activities in the localities. Political implications are derived directly from these economic observations. The prevalent view is that the economic reforms have reduced the political control of the center and indeed have called into question the viability of China as a single political entity. This article disputes these views. It shows that economic decentralization has been accompanied by a strengthening of China's unitary political system. This has direct bearings on local economic conduct. Because of the political and institutional constraints, local officials surrender tax revenues to the central government and curb their inflationary investment demand.