Experiences since structural adjustment in China's agricultural sector suggest that the portion of the market which has been deregulated shows considerable economic rationality among the major actors in the market. Data used were generated during a period when China was following a gradual approach to the liberalization of markets, and the results suggest that the approach has merits for freeing agricultural markets. On the supply side, producers have been price responsive in supplying the free market, and a major institutional adjustment in the organization of farms indicates that fewer distortions have led to increased outputs for the market. On the demand side, home produced foods for rural consumer and rationed foods for urban consumer substitute for free-market goods. The income elasticity for food in the free market is more elastic in rural than in urban households as one would expect, since rural incomes are approximately one-half those of urban dwellers.