Since the mid-1990s increasing competition forced China’s failing and bloated state enterprise sector to reform. Over 25 million urban workers were made redundant. What were the implications for unemployment, inequality and poverty? DFID funded a British (Oxford and Nottingham) contribution to an international research project based in the Chinese Academy of Social Sciences: an overview of the DFID work is given in this report. A representative household survey was conducted to explore these issues. It shows that the efficiency gains have been achieved only at considerable social cost: high and prolonged unemployment, rising income inequality and the emergence of urban poverty. More effort is required to alleviate the problems of this acute structural adjustment.