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Decentralization in China in the 1990s placed township hospitals (TH) at the heart of rural Chinese health care. We collected data from a sample of 21 THs in Shandong province in order to analyze the determinants of their activities and assess their efficiency during the period 1986-2000. Among other results, and controlling for other factors, we find that local income per capita in the TH area of activity as well as the perceived attractiveness of THs have positive effects on the number of outpatients and inpatients treated. The price of care has a negative effect and existing medical insurance schemes have no significant effect. The partial vertical integration of village health stations with THs seems to have slowed TH activity. The efficiency of THs has improved, with some convergence in our sample. Financial constraints, human resource issues, and institutional factors related to the regulation of hospitals by the supervisory body and to the governance of this body played important roles in this overall positive evolution.