This article looks at flaws in theLaw of China on Promotion of Small and Medium-Sized Enterprises 2002 (the Chinese Law on Promotion of SMEs 2002) and the Anti-Monopoly Law of China 2007 (the Chinese Anti-Monopoly Law 2007), as well as examining the inconsistencies between the State's industrial policy and the current legal framework for Chinese privately owned SMEs. Although legal protection for SMEs is not a new research area in China, little scholarship has been devoted to conflicts between "law" and 'policy" from a relationship standpoint between State-owned enterprises (SOEs) and privately owned SMEs. It argues that these SMEs are less able than SOEs to obtain chances for robust growth due to their privileges and immunities. By ignoring the market function, but emphasizing the economic role of the State, and by offering no genuine sanctions for senseless intervention from the State's industrial policy, the Chinese Law on Promotion of SMEs 2002 and the Chinese Anti-Monopoly Law 2007 fail to establish fair competition circumstances for privately owned SMEs. Why cannot these two laws overcome the State's industrial policy? Different approaches to achieving dissimilar goals in the Chinese market would be the answer. Thus, this article demonstrates that administrative powers granted by the State's industrial policy are the biggest obstacle for privately owned SMEs, and then recommends methods to resolve this dilemma from the perspective of the Chinese Anti-Monopoly Law 2007.