This article studies the FFH in Chinese stock market under the Contract Theory. It is found out that: i) there was no functional fixation phenomenon in 1997 and 1998; ii) the stock market priced extraordinary items much more than operating income from 1999 to 2000; however, this phenomenon can be explained using contract theory and the persistence of earnings; iii) the government policy change of stock-rights offering in 2001 weakened the role of extraordinary items, and the market pricing of extraordinary items went back to normal and the FFH phenomenon disappears. All of above mean that under the special political and economic circumstances of China, the contract of stock-rights offering affects the pricing of stock and provides us a better understanding of FFH. The procedure of pricing of earnings is a rational action based on the economics circumstances rather than on the psychological factors.