Along with the collapse of work unit system, the living space, social organization and urban management in China have gone through tremendous changes.  How to explain the connection between resident self-organization and government embeddedness in communities became the key to understand the state-society relation in current China.  Based on participant observation and in-depth interview, this article supplied an extended case study on a six-year long community conflict incident.  From the theoretical perspective of social capital construction, this article analyzed the formation process, expansion mechanisms and institutional limits for community grassroots self-organization. The findings are: the intangible capitals of the state, such as rule of law, facilitated the human capital’s conversion to community social capital, which became the foundation of grassroots self-organization.  The interlocking network based on we-chat groups, the online-offline interaction and the rules of democratic negotiation buttressed the structuration of grassroots self-organization based on bonding and bridging social capital, which thus overcome the vulnerability of self-organization. However, the interactions with residents’ committee and home-owners’ association did not gain the grassroots self-organization power and resources through building linking social capital with the state. This indicates the institutional limits to the sustainable development of grassroots self-organization in current governance structure of communities.