China has experienced dramatic changes since its economic reform programme in 1978, and it is in the process of creating a functioning urban labour market that rewards workers on the basis of human capital. A 2002 nationally representative household survey is used to investigate how far a competitive urban labour market China has been created. We find evidence of both segmentation and competition between urban residents and migrants which is consistent with previous studies. In addition, there is evidence that segmentation exists across sectors for urban residents, with those currently working in government agencies and institutions being the highest-paid tier, followed by state-owned enterprises, private-invested enterprises, those in urban collective enterprises and self-employment are considered as the lowest-paid tier. Although we do not find evidence of segmentation among migrants, our data suggest that migrants are blocked from getting jobs in the 'upper-tier' for urban residents, and thus are forced to engage in self-employment. Therefore, the urban labour market is segmented into multi-tier and is still in a transition stage.