Social capital is thought to play an economic role in the labour market. It may be
particularly pertinent in one that is in transition from an administered to a market-oriented
system. One factor that may determine success in the underdeveloped Chinese labour
market is thus guanxi, the Chinese variant of social capital. With individual-level measures
of social capital, we test for the role of guanxi using a data set designed for this purpose,
covering 7,500 urban workers and conducted in early 2000. The basic hypothesis is
supported. Both measures of social capital – size of social network and Communist Party
membership – have significant and substantial effects in the income functions. Indeed, social
capital may be just as important as human capital: remarkably, one additional reported
contact contributes more than one additional year of education. Social capital can have
influence either in an administered system or in one subject to market forces. We find that it
does so in both parts of the labour market, but some of the evidence suggests that it is more
important in the latter.