This paper adopts the state capitalist approach to explain the development of labor politics, particularly changes in union capacities, since the reform period. In China, state capitalism not only entails the persistence of state intervention in labor markets, but also state fragmentation and the importance of informal institutions. Since the 1990s, the Chinese state’s promotion of state-owned enterprises has created barriers for private enterprises. To achieve profits, private enterprises colluded with local governments to bypass formal institutions and regulations. For labor relations, this led to the lax implementation of labor laws and union marginalization. While the rise of labor disputes and the turn of central policy towards social issues prompted local governments to respond by increasing union capacities, unions were given the role of preventing labor unrest rather than articulating workers’ rights. Based on empirical analyses using a new provincial-level dataset compiled on union capacities and labor dispute settlements and a mini case study, this paper obtains the following findings. By controlling for economic and firm factors, more disputes were resolved when unions had additional capacity to participate in the resolution of labor disputes. The findings also suggest that the growth of union capacities alone did not improve the unions’ representation of workers, and thus the findings not only cast a less optimistic light on the prospect of union autonomy but also have theoretical implications for studies on state capitalism.