While the existence of a class, gender, or ethnic gap in educational attainment is well documented for many societies, how the practice of grade retention contributes to these patterns of educational inequality has been inadequately addressed. Given that grade retention is commonly practised in Macao, Macao is used as a case for illustration. Using data from PISA 2009 and a qualitative research project, we seek to demonstrate how inadequate state regulation could make possible the manipulation of grade retention institutionally and individually in Macao. This, in turn, illustrates how the specific contextualized structural operation of grade retention could serve as a mechanism for social differentiation and thus play a role in contributing to the observed educational inequality.