In China's transition to a market economy, the old socialist system which included full employment and comprehensive social welfare for urban citizens has been replaced by an emerging labour market and a rebuilt social security. The collapse of the old system has thrown a large number of retrenched state workers into poverty and then concentrated the poor in particular communities. This study specifically addresses urban poverty in the state-enterprise residential areas and private housing areas of two cities in northeastern and southwestern China. The two-step study firstly profiles the poverty and characteristics from city to individual level and then identifies the main determinants of poverty in the early 2000s. Urban low-income households had suffered multidimensional disadvantages due to a number of factors including increasing inequality, industrial reconstruction, legacies of the socialist system and the policy and financial burdens of their (previous) affiliated danwei (work units). Data analysis also show that for individual household, employment status, position of the household head and the sector the household head worked in were important to overcome poverty. The emerging poverty in urban communities indicates that a substantial part of residents did not benefit much from development. Moreover, degradation of these communities increases the risk of becoming slums and further marginalization.