Our analysis of more than 1,000 Chinese listed firms, 2003–2005, reveals a positive association between state ownership (SO) and firm performance. Arguably, if SO “causes” performance, it must be through the channel of agency cost. Therefore, our paper checks the robustness of this positive SO/performance finding by analyzing the role of agency cost as a mediator. It emerges that SO in the Chinese context may represent a strategic asset rather than an agency burden. However, it is not clear whether this is an outcome driven by efficiency or power.