Abstract One of the main concerns of New Institutional Economics is to explain the pervasive existence of inefficient political or economic arrangements. However, quite different explanations of this phenomenon are offered. Some authors consider it a result of formally established rules, others think it is caused by traditional cultural beliefs, yet others ascribe it to evolved social relations. But each of these approaches can only cover part of the truth. In this paper I suggest that societal development and endurance can only be explained if we consider the dynamic interactions between formal, cultural and social institutions. In applying this theoretical framework to the development of the Chinese economy during the past thirty years, I will argue that the special relations between the socialist political system, Confucian familist culture and social relationships namely Guanxi have contributed to the rise and concomitant problems of the Chinese economy. On this basis it might be possible to answer two questions that have troubled scholars for decades: How could the Chinese private economy flourish without well-defined property rights? Why did the Chinese entrepreneurs fail to lead China to further political reform after having achieved huge success on the market?