This paper aims to shed light on where China's reform process is heading by tracing the trajectory of its market-oriented reforms. It shows that Chinese market socialism is facing a dilemma. Developing the capital market and hardening local government budget constraints which are necessary for the structural adjustment of the economy would require China to go beyond the limits of market socialism. Focusing on socialist values and ideology might gain more political traction for the party but could also seriously change the political climate and trigger an unorganized collective action among government officials that unleashes massive bureaucratic interventions and destroys the market's vitality.