How are urban residents distributed and agglomerated across different-sized cities? This question can be addressed by studying urban system or Zipf’s law. Using Chinese data for the period of 1990–2017, this paper contributes to the literature by exploring the evolution of urban system, and more importantly deviations from Zipf's law. It is found that (1) The size distribution of Chinese cities, as expected, did not follow Zipf’s law until very recently. Both large cities and small towns were under-sized relative to the Zipf’s law, implying possible loss of agglomeration economies; (2) When the top 10% large cities are excluded, the Chinese data fit the Zipf's law better, demonstrating the adverse role of government interference in containing the growth of mega-cities; (3) By and large, the distribution has been moving closer or further away from Zipf’s law, corroborating with policy directions in the relevant five-year plans of the central government; and (4) Government interferences helped enlarge while market forces helped reduce the numerical deviations of individual cities from Zipf’s law. The last three analytical findings are the first in the literature since no previous studies have focused on the issue of why urban system in China does not follow Zipf’s law. In particular, no earlier efforts have been made to model numerical deviations from Zipf’s law, as attempted in this paper. The results appeal for removal of government interferences and furthering market-based reforms in order to reap economies of agglomeration.