The purpose of this paper is to analyze some major elements of a market-oriented reform drawing on the experiments carried out in selected cities prior to the 1988 Reform Plan. Following a general introduction about the status and context of reform in China, the paper selects some critical issues for the introduction of market mechanisms in urban housing. First, it analyzes pricing and allocation reforms in the existing stock. The present policy of low rents where urban households spend about 1% of cash income on housing is unsustainable and leads to ever growing distortions and large scale subsidies. The paper provides an analysis of the tenure choice based on the user-cost of capital concept to show the functional relationship between rent reforms and the potential development of home ownership in Chinese cities. Pursuing further the critical distinction between the demand for housing ownership and that for housing services, the significant efficiency benefits that can be derived from allowing the free exchange and allocation of existing housing units are evaluated. Finally, the paper provides suggestions to improve the present approach to housing reforms in China regarding sale prices, the setting of rents and credit conditions offered to finance housing sales. Particular stress is placed on property rights reforms to achieve maximum economic and social benefits from urban housing reform.