Since the implementation of the Labor Contract Law (LCL) in 2010, a significant increase in the capital/labor ratio, known as capital deepening, has occurred in private firms in China. However, the cause and impact of the capital deepening is still in question, as either technological change or a higher cost of labor might cause it. Using data from the Chinese Private Enterprise Survey in 2008 and 2012, two critical findings are reported in this study. First, pension coverage significantly affected the capital/labor ratio in private firms after 2010. Second, large private firms are able to generate higher total factor productivity after the implementation of the LCL because they can adjust their production function more easily than smaller competitors. These findings have policy implications for reforms in the Chinese labor market.