Abstract: This article examines one critical but understudied question: how does China challenge the international order through multilateral institutions? By integrating institutional balancing theory in international relations (IR) and prospect theory in behavioral psychology, this article introduces a “prospect-institutional balancing” model to explain how China has utilized two types of institutional balancing strategies to challenge the US-led international order. We argue that China is more likely to use inclusive institutional balancing to challenge the United States in an area where it has a relatively advantageous status, such as the economic and trade arena. When China faces a security challenge with disadvantageous prospects, it is more likely to take risks to conduct exclusive institutional balancing against the United States. Using China’s policy choices in the Asian-Pacific Economic Cooperation (APEC) and the Conference on Interaction and Confidence-Building Measures in Asia (CICA) as two case studies, the project tests the validity of the “prospect-institutional balancing” model. It concludes that China’s institutional challenge to the international order will be more peaceful than widely predicted.