Abstract: Political economy is a theory that studies the formation, development, and transformation of economic system. Institutional innovation is regarded as one of the greatest innovations of all times. The evolution of economic system follows its own internal logics and basic rules, which are mainly reflected in the following six characteristics: Institutional evolution moves forward with incremental accumulation and marginal innovation; Institutional changes are usually driven by internal crises and external shocks; Institution displays a strong endogenous characteristics; Institutional innovation often relies on building social trust relationships; The benefits of institutional innovation should outweigh its cost; The economic system evolutions principally follow the same trend. The reform of China’s economic system is a modern economic innovation, which is grown from China’s actual national conditions and in line with the trend of world development. Also, it is a self-revolution of the socialist economic system and has greatly contributed to the miracle of China’s 40 years of high economic growth.