||This paper introduces two main components of China’s Ethnic Preferential Policy: fiscal Transfer Payments and political affirmative action on the part of ethnic officials. By using a special sample design and panel data from 1996-2006, this paper provides empirical evidence to support the argument that China’s ethnic policy does allocate more resources to Minority Autonomous Counties through the Transfer Payments system. However, due to different expenditure preferences, governments in Minority Autonomous Counties do not always devote these extra resources to development-related expenditure. Instead, Transfer Payments largely flow into administration and wage compensation. This different expenditure structure provides an explanation for the paradox of the simultaneous occurrence of higher fiscal revenue, poor public goods provision, and slower economic development in minority areas.