Faced with the rising threat of social instability, the central government in China has launched the rebuilding of social security system since 2002. Local governments, especially city- and county-level governments, are the principal agents implementing this ambitious policy initiative. However, the achievements in establishing social security system vary significantly, even among locales in the same province. In order to identify the factors causing divergence of outcomes, this article compares two similar county-level cities with different social security system performances. Through extensive interviews with key actors, the authors found that the development of local social security system is highly related to the nature of the relationship between local governments and local businesses which is shaped by specific economic development paths. This finding sheds light on the rationale of local governments’ selective implementation of central policies, and why social security systems in some localities but not others may “race to the bottom” in the competition for capital.