Despite the lack of electoral accountability and median voter’s redistributive prefer- ences, China has built an expanding welfare system that is set to include most citizens. Why does China defy the conventional prediction of an exclusive autocratic welfare state? This paper argues that the state adopts a “demand-driven strategy” where the redistribution effort varies with the expected collective action of economic losers. Us- ing legacy state-owned enterprises (SOE) as an instrumental variable for laid-off SOE workers in Chinese counties, the paper finds that preexisting urban grievances explain local states’ later efforts to establish a welfare state. The effect dominates effects of realized protests, suggesting that structural knowledge about potential grievances is more important in formulating policy concessions than situational knowledge like revealed grievances in authoritarian states.