Why do central state-owned enterprises (SOEs) in China enjoy rapid development while, overall, the state-owned economy is experiencing a contraction? The extant theories have separately argued that the support of the central government and compliance with market requirements are the driving forces behind the success of central SOEs. However, these theories have neglected the local governments’ role in the expansion of central SOEs. This article contends that variations in provincial fiscal capacity have contributed to the development of central SOEs. If a province has a weak fiscal capacity, local governments welcome central SOEs to merge with their local SOEs. In this way, the local governments can save up the fiscal grants intended for local SOEs and promote local economic development. At the same time, central SOEs gain access to the resources and expand their markets by merging with the local SOEs, thereby strengthening the central SOEs. On the contrary, if a province has a strong fiscal capacity, the local government will invest a large amount of fiscal resources to help its local SOEs survive. As a result, the expansion of central SOEs is hindered in such type of province. This article uses paired comparison of two provinces in China, Zhejiang and Liaoning, to test this hypothesis.