China’s economic modernization has created a new underclass population characterized by destitution and dispossession. This group is linked to social instability that intimidates the state’s control of the society. This article examines Chinese penal policy changes in the face of the rising underclass in urban areas. It sets a preliminary comparative analysis on the penal strategies of this new disadvantaged group in the USA and China. In reviewing the penal practices in both realms, the article argues that China shares an ideological affinity with its western counterparts for imposing punitive and managerial justice on the underclass. However, this rationale is realized in different ways. In China it is realized through the operation of an extensive system of administrative detention (different from criminal punishment), which is run by public security officials and is not part of the judicial system. Being located outside the judicial system enables greater efficiency by channelling the underclass through more flexible and cost-effectiveness forms of incarceration and control.