We examine the real effects of China's 2009-2010 stimulus package on innovation differentials between state-owned firms and privately-owned firms. Using a unique dataset of Chinese manufacturing firms, we find that state-owned firms are as same innovative as its private counterpart in the pre-stimulus period. However, after the stimulus, state-owned firms filed significantly more invention and utility patents compared to its private counterpart. The stimulus package provides state-owned firms with higher investment subsidies and lower financing costs, which mediate the positive effect of state-ownership on innovation in the post-stimulus period. Further evidence shows that the effect of subsidies and financing costs is more pronounced among firms in strategic sectors, centrally controlled SOEs, and firms located in high marketization provinces.