Abstract: Institutional innovation is the source power of China’s rapid economic development after the reform and opening up. China’s economic institutional innovation is highly endogenous and path-dependent in nature, and is closely related to China’s conditions, history and development stages. Such an institutional innovation usually takes an internal and top-down approach, and quantitative changes gradually accumulate to qualitative transformation over time. The innovation of economic institution is not only restricted by productivity, but also deeply influenced by historical and cultural traditions. Since 1978, China has adopted a step-by-step approach to reform its economic system which is in line with China’s reality. The reform starts from the weakest part and the most marginal area of the planned economy, begins with circumventing or breaking through the existing rules and regulations, and is implemented from micro-level to macro-level gradually. Having witnessed the transformation of China’s economic system, China’s economic institution innovation should follow the right direction, persist in adopting a progressive approach and deepens reform comprehensively in the future.