In a world in which the United States holds a preponderance of power, how does China design a grand strategy to advance its security interests? In this article, I argue that China is balancing American power in a “smart” manner. Currently, Beijing is pursuing a grand strategy that combines both internal balancing and external “soft balancing.” The strategy of internal balancing aims to increase China’s relative power through economic development and military modernization with an emphasis on asymmetric capabilities, whereas the strategy of soft balancing is designed to limit or frustrate U.S. policy initiatives deemed detrimental to Chinese interests through diplomatic efforts in multilateral institutions and bilateral partnerships. The strategic logic is to maintain a stable external environment for China to concentrate on economic growth and accumulate relative power—without provoking a vigorous U.S. response. In the long run, however, a strong and prosperous China would likely shift to a more assertive stance in foreign affairs.