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Subsidy of urban public transport is very important to institutional arrangements for supplying public traffic service. As a government intervention means, it reflects profound relation with local authority and operating enterprises of public transport. In such sense, the subsidy reform can be regarded as reconstructing relationship with government and enterprises and regenerating mode of operating, which is a part of the reforms of Chinapsilas transition to a socialist market economy. This paper treats the subsidy as an incentive design, analyses the problems of traditional framework of subsidy mechanism for urban public transport in China, discusses the relationship between public transport enterprises and government, tries to reconstruct framework of subsidy mechanism, and studies on institutional arrangement of subsidy with applying competitive franchising system. As a result, the goal of promoting the development of chinapsilas urban public transport in the future, decreasing government public financial supports and maximizing the social efficiency can be realized.