This article reviews new literature on the development of China's private sector. Since this sector's development is embedded in and characterised by a wider institutional environment, several general characteristics of China's capitalist transformation are discussed. Insights drawn from political science help in the understanding of the strategy of "wearing a red hat" and the emergence of China's private sector. The closely interwoven relationships between private companies and the Party-state that have taken place since the 1990s are also examined. The review indicates that focusing on state/capital relationships at different administrational levels contributes to a better understanding of China's private sector. The main conclusion is that although the development of the new private enterprises enabled the ruling elite to form and consolidate a hegemonic project that provided relative societal coherence, the project's continuity is threatened by a tendency for crises to occur.