My dissertation examines China's economic transition and current state-market relationships with regard to the reforms of state-owned industries over the last 28 years. In the case of China's tobacco industry, this historical study explains three puzzles. First, why China's tobacco industry—a sector that is supposedly controlled by a central planning system—was "monopolized" by the local governments in the 1980s and 1990s; second, why this particular state-owned industry has boomed in some regions (e.g., Yunnan province) based not on privatization but on the strategies of horizontal combination and vertical integration erected by the local tobacco firms; and third, why the central government has enforced a merger movement among China's tobacco firms and has "corporatized" the state bureaucracies governing this sector recently. The central thesis is that the state bureaucracies governing China's tobacco industry have been strengthened by involving themselves in the market-building projects. This study reveals that in governing the economy during China's reform era, the Chinese state has acted as a "rational market competitor" who actively seeks various strategies to cope with the concrete market dynamics and pursue maximum profits, including rebuilding its internal structures into those favoring economic growth. The "competitive" nature of the Chinese state has played and will continue to play a positive role in its economy.