China does not have a federalist system of government. Nevertheless, with deepening reform and openness, China's political system in terms of central–local relations is functioning more and more like federalism. Federalism as a functioning system in China has been understudied. This paper defines the political system existing in China as de facto federalism, and attempts to explore the sources and dynamics of this de facto federalism. China's de facto federalism was mainly driven by two related factors, i.e. decentralization and globalization. This paper argues that while economic decentralization in the 1980s led to the formation of de facto federalism, globalization since the 1990s has accelerated this process and generated increasingly high pressure on the Chinese leadership to institutionalize existing de facto federalism.