The process of economic reforms launched in 1978, and gradually extended until current days, has catapulted China into a stellar growth trajectory that has proven highly resilient. In this paper, we estimate the effect on economic development of China’s industrial policy, in particular, the establishment of Special Economic Zones (SEZ), a salient economic reform. We use data from a panel of 276 Chinese cities and prefectures from 1988 to 2010. Our difference-in-difference estimator exploits the variation in the establishment of SEZ across time and space. We find that the establishment of a state-level SEZ is associated with an increase in the level of GDP of about 20%, but not with a permanently steeper growth path. This finding is confirmed with alternative specifications and in a sub-sample of inland provinces, where the selection of cities to host the zones was based on administrative criteria. Decomposing the effect of SEZ on GDP into different channels shows that this worked mainly through the accumulation of physical capital, although there is some evidence of increasing productivity and human capital investments. Using light intensity as an alternative measure for economic activity confirms the positive effects of SEZ.