Despite the phenomenal success of China's economic reform, the Chinese economy encounters a series of increasingly perilous problems, such as the recurrence of a “boon‐and‐bust” cycle, inflation, corruption, and regional disparity. This paper argues that the root of these problems is the discrepancy between the reforms in the macropolicy environment and the reforms in the micro‐management institution and resource allocation system. In October 1993, the Chinese government introduced a reform package in a bid to make the macro‐policy environment more consistent with the liberalized micro‐management institution and resource allocation system. However, the traditional macro‐policy environment was formed endogenously to facilitate implementing the “catching‐up and forging‐ahead” development strategy. Unless, the Chinese government abandons that strategy, it cannot complete the reforms in the macro‐policy environment and it cannot uproot the problems appear