The economic reform in the PRC inaugurated by Deng Xiaoping in 1979 has changed the landscape of the regime's environmental governance by putting it in a more market-oriented context. As a strategy to strengthen administrative capacity in a situation heavily circumscribed by the limited resource support from local governments, the environmental protection authorities at all levels have established a sizable number of service organizations to provide them administrative support. These service organizations have to sponsor their own operation by engaging in revenue-generating or fund raising activities. This has led to the emergence and proliferation of service organizations in the environmental governance system in the last decade. This article will examine, from a state capacity perspective, institutional reform in the environmental governance system of the PRC1.