We examine how state ownership affects Chinese firms’ earning management during a period of high valuation. Based on a sample of 19,107 firm-year observations with sufficient data on the China Securities Markets and Accounting Research (CSMAR) database over the period from 2003 to 2017, we find the magnitude of accruals management first increases for up to three years of high valuation, and then reduces after the fourth year. This finding is consistent with the view that the difficulty of consistently using accruals to manage earnings upwards increases over time because of the reversing nature of accruals. We find that managers turn to using real earnings management after four consecutive years of high valuation. Next, we examine whether the degree of earnings management in highly-valued firms differs between state-owned enterprises (SOEs) and non-state-owned enterprises (NSOEs). Supporting the view that SOE managers have less incentive to sustain high stock prices and manipulate earnings upwards, we find evidence that highly-valued SOEs have significantly lower level of abnormal accruals than highly-valued NSOEs, and lower levels of real earnings management after four consecutive years of high valuation.