Over the past 21 years, economic reforms have transformed China from a relatively inefficient, centrally planned, economy to one that is significantly more market-oriented. The gains in efficiency resulting from free market policies have helped make China one of the world's fastest growing economies in recent years. A key policy in China's economic success has been the decentralization of economic production, which has helped produce a thriving private sector in China. Prior to 1979, Chinese government policies eliminated most private enterprises. However, over time, the central government's policy towards the private sector has evolved from prohibition, to toleration, to active encouragement. Chinese government data show that the number of private sector employees (i.e., those working for a privately-owned Chinese company or self-employed) rose from 4.5 million in 1985 to an estimated 81.3 million in 1999. The percentage contribution of the private sector to industrial output rose from 1.9% in 1985 to 17.9% in 1997. These data indicate that the private sector in China has become a major factor in China's economic growth and development. The growth of the private sector in China has occurred to a large extent from the government's efforts to reform China's money-losing state-owned enterprises (SOEs). Workers who have been laid off from SOEs have been encouraged to find jobs in the private sector or to start their own businesses. Yet, private firms in China continue to face a variety of discriminatory policies that restrict their development, especially in sectors dominated by the SOEs. However, in preparation for its eventual accession to the World Trade Organization (WTO), the Chinese government has announced plans to end most restrictive policies against Chinese private firms. Some analysts contend that WTO membership for China serves U.S. interests by expanding capitalism and diminishing the government's control of the economy, promoting the rule of law in China, subjecting China's trade regime to multilateral trade rules, and creating new markets for U.S. Goods and services. Others question whether China's membership in the WTO is good for U.S. Interests, especially if China's economic development threatened U.S. jobs at home, China failed to faithfully implement its WTO obligations once it became a member, China opposed U.S. trade liberalization objectives in the next round of WTO multilateral negotiations, or if economic liberalization failed to produce improvements in human rights conditions in China. Either way, this report indicates that the private sector is growing in China and will likely continue to expand in the near future, although it is unclear whether the Chinese government is prepared to truly give private firms an even playing field. A key question is whether China's private sector will be kept as a complimentary feature of China's "socialist market economy," or whether it will it be allowed to develop into the dominant sector of that economy. This report examines the changing role of China's private sector, and the outlook for its future development.