This paper is an attempt to present an analysis of China’s decentralization and local governance practices, the dilemmas rooted in the current institution. We argue that the misbehavior of local government officials is endogenous to China’s central–local structure and that competition among localities has become distorted and constrained by various policy burdens and development mandates imposed from above. The information asymmetry for the enforcement cost of mandates that exists between central and local governments not only leads to difficulties and distortions in local performance evaluations, but also creates opportunities for local bureaucracy expansion and rent-seeking. Enhancing fiscal transfers, or strengthening political restraint, although necessary, would be far from enough to solve the local governance problems. The ultimate solution entails an in-depth deregulation reform on factor mobility and a furthest eradication of policy mandates for the local government. This paper is an attempt to present an analysis of China’s decentralization and local governance practices, the dilemmas rooted in the current institution. The Argument that the misbehavior of local government officials is endogenous to China’s central-local structure and that competition among localities has become distorted and constrained by various policies burdens and development mandates imposed above above. The information asymmetry for the enforcement cost of mandates that exists between central and local governments not only leads to difficulties and distortions in local performance evaluations, but also creates opportunities for local bureaucracy expansion and rent-seeking. Enhancing fiscal transfers, or strengthening political restraint, though necessary, would be far from enough to solve the local governance problems. The ultimate solution entails an in-depth deregulation reform on factor mobility and a furthest eradication of policy mandates for the local government.