Scholars increasingly conclude that China has created a distinct economic system. Yet despite a growing literature with valuable contributions on the institutional arrangements under ‘capitalism with Chinese characteristics’, the economic mechanisms underpinning China’s state–market relations remain undertheorised. In this paper we develop a conceptual framework of what we call China’s state-constituted market economy. We argue that the Chinese state ‘constitutes’ the market economy by not only creating new markets through industrial and innovation policies, but by continuously participating and steering markets for essentials in order to stabilise and guide the economy as a whole. Essential is thereby defined as ‘systemically significant from the perspective of the state’. This micro–level state–market participation in essential sectors complements macro-level state–market participation through monetary and fiscal policy. It is also distinct from the reliance on direct planning or command-and-order instruments of economic governance since micro-level state–market participation relies on utilizing market dynamics. We draw on China’s statecraft tradition to conceptualise state market-constitution in China as a constant balancing act.