Ironically, the railroad, that was supposed to create an economic boom, caused an economic crisis: California got flooded with both cheap manufacturing goods from the East Coast and poor unemployed European immigrants. The Chinese became the favorite scapegoats of poor white workers. Chinese immigrants had always been willing to work for lower salaries (in fact, they had no other option) but now white workers saw that as unfair competition. During the Gold Rush, employment in orchards and lumbermills consisted of lower-paid jobs, but now they were more lucrative jobs than mining, so now white workers wanted the jobs that twenty years earlier only the Chinese had been willing to take. Chinese workers were often harassed and abused. A consequence of the hostile atmosphere in the countryside was that many Chinese abandoned the old mining and agricultural camps and took shelter in the safer Chinatowns, notably the San Francisco one. Many of these rural "Chinamen" arrived in San Francisco with enough savings to purchase homes, and some even became landlords.

Even in the cities the discrimination was obvious. For example, in September 1859 San Francisco opened the "Chinese School" in Chinatown, a segregated public school for Chinese children. In 1866 California restricted public schools to white children, specifically excluding "Negroes, Mongolians, and Indians" ("Mongolians" being the Chinese and "Indians" meaning the indigenous population).

By 1870 the population of San Francisco had increased to 150,000 people, almost all of them arriving or born in the previous 22 years.

The reputation of the Chinese kept deteriorating as more Chinese men got involved in crime and Chinese women in prostitution. While the vast majority were neither criminals nor prostitutes, the stereotype kept spreading. In 1866 the state of California passed laws to curb the Chinese brothels. A census of 1870 classified 61% of 3,536 Chinese women in California as prostitutes. Ethnic tensions further increased after 1868 when the USA and China signed the Burlingame Treaty, which de facto opened the gates to large-scale Chinese immigration to the USA. In 1874 the Occidental and Oriental Steamship Company was founded (by the two US railroads of the transcontinental railroad, the Central Pacific and the Union Pacific), which replaced the Pacific Mail Steamship Company as the main transportation means for the Chinese coming to America.

In 1870 Los Angeles had a population of 5,728 people, of which 172 were Chinese. In 1870 in Los Angeles a highly publicized violent conflict exploded within the largest Chinese association, the See-Yup Company, and the notorious Chinese prostitute Sing-Ye was tortured by five gangsters. This was the worst form of publicity, confirming the racist feeling that the Chinese were not worthy of living among Whites. In October 1871 hate against Chinese men turned violent and even deadly in the streets of Los Angeles, where 18 Chinese were lynched, and then the riots spread to other towns that had Chinese communities. In July 1877 an anti-Chinese riot in San Francisco by Irish fanatics left four people dead. That's when the old Chinese associations joined in the Chinese Consolidated Benevolent Association (the "Six Companies"). Several white organizations, notably Denis Kearney's Workingmen's Party, started lobbying California politicians to stop Chinese immigration and even expel the Chinese already in California.

In 1880 the Chinese (numbering about 500) were the largest ethnic minority group in Los Angeles.

It became popular for California politicians to blame Chinese immigrants for unemployment among Whites (for "stealing" white jobs). The Chinese entered the business of canneries because they were slowly kicked out of the fishing business through a sequence of taxes and regulations that explicitly targeted them. In 1876 white people even formed an Anti-Chinese and Workingmen's Protective Laundry Association in San Jose, which convinced several laundries to change occupation. Chinese laborers were arriving at rates much higher than during the Gold Rush: in 1876 there were 151,000 Chinese in the USA of which 116,000 were in California. However, Chinese women couldn't come anymore: in 1875 the "Page Act" of the USA de facto banned immigration of Chinese women, because they were viewed as likely prostitutes. California's politician Horace Page justified it to "end the danger of cheap Chinese labor and immoral Chinese women". In December 1875 US president Ulysses Grant himself said that "Chinese women... few of whom are brought to our shores to pursue honorable or useful occupations." In 1882 of the 40,000 Chinese who immigrated into the USA only 136 were women. The Page Act created a gender imbalance that would last until World War II. The men of Chinatown learned to live without families.

Meanwhile, a nationwide economic crisis engulfed the East Coast. The largest bank in the USA, Jay Cooke, went bankrupt, leading to the "panic of 1873". In 1879 California adopted a new constitution with an article that denied ethnic Chinese citizens the right to vote, forbade companies from hiring Chinese workers, and de facto encouraged cities to expel Chinese people. In 1880 the USA began to limit immigration from China and in 1882 the "Chinese Exclusion Act" suspended altogether immigration of Chinese laborers for a period of 10 years (the ban was renewed every ten years and repealed only in 1943, so it ended up lasting 61 years), besides depriving the Chinese already in the USA of citizenship (and therefore depriving them of the right to vote). This was the first time in the history of the USA that a national group was discriminated against by the government itself.

The Exclusion was often followed by "expulsion". In February 1885 the northern region of Eureka (today's Humboldt County) expelled to San Francisco all ethnic Chinese on a short notice. White terrorists set fire to Chinese property all over the state.

The Chinese population of 1880 in the whole of the USA was 105,465, out of 50 million people. No surprise that it remained roughly the same and sometimes even lower in the next six decades, despite the fact that the population of the USA grew to 76 million in 1900, 106 million in 1920 (when the Chinese population actually declined to 85,000) and 132 million in 1940.

The Chinese were de facto banned from the city’s fashionable elite, the elite that was enjoying Andrew Smith Hallidie's steam engine-powered cable cars, which debuted in 1873 (simply an evolution of mining conveyance systems), Frederick Layman's fancy "Telegraph Hill Observatory, Restaurant, and Concert Hall", which opened in July 1882, and the electric streetcar, which opened in April 1892, connecting the city with the Colma cemeteries.

Anti-Chinese riots continued and peaked in 1885 with the "Rock Springs massacre" in Wyoming territory, when white miners on strike killed 28 Chinese strikebreakers. The "exclusion" was particularly effective in the countryside: California's farm workers were mostly Chinese and were almost all expelled, replaced by Japanese workers. The first Japanese colony in North America had been established near Coloma in July 1869 by Japanese immigrants from the town of Aizuwakamatsu (some of them were samurai). In 1880 there were only 145 Japanese in the USA, compared with more than 100,000 Chinese. By 1924 the Chinese population had declined 20% while the Japanese population had multiplied thanks to 180,000 Japanese immigrants.

The Chinese miners, fishermen and farmers who were expelled from the rural areas moved to the various Chinatowns. Los Angeles' Chinatown slowly shifted east from its original locationm and the Garnier Building (built by French immigrant Philippe Garnier in 1890) became its unofficial city hall (today's Chinese American Museum of Los Angeles). The Los Angeles branch of the Chinese Consolidated Benevolent Association was established in 1889.

It is interesting that the Chinese immigrants resisted the pressure to conform in terms of dress code and hair style. After all, those were the aspects of the Chinese race most often mocked by the white majority. While Muslims may resist the pressure to convert to Christianity because they believe that an omnipotent god is watching them and would condemn them to hell, nothing of the sort applies to the dress code and the hair style of the Chinese. The "huiguans" did act as guardians of Chinese traditions, but they were in no position to enforce the dress code of the thousands of Chinese spread all over California. Nor were the immigrants so overtly nationalist to employ the traditional Chinese dress and the "pigtail" (the racist name for their hair style) as a political statement. By sticking to those traditions, they increased the risk of persecution, and, yet, they did stick to them.

At the same time, San Francisco's Chinatown did have a problem of crime. Many "tongs" formed as Chinatown grew. The Chinese community was relatively isolated in the city and only superficially protected by the police, creating the ideal conditions for crime gangs to form and prosper. The members of the tongs were generally poor and quasi-illiterate, whereas the members of the traditional Chinese associations (now six of them) were generally wealthy and educated. The tongs got into violent crime after entering the shady world of gambling and prostitution, both highly lucrative businesses that required "protection", and that were accompanied by consumption of opium.

Jackson Street was Chinatown's red-light district. Because the demand for prostitutes was so high (given the men-women imbalance), they started kidnapping girls from China. Soon the tongs started fighting each other for control of the territory. The Six Companies were the only meaningful obstacle to the tong. The "tong wars" peaked in the 1880s and 1890s. An article of March 1891 in the Daily Alta California read " The Traffic in Human Flesh Still Carried On" and accused "the Chinese slave-owners" of smuggling in girls from China: "every Chinese girl in San Francisco has a marketable value of from $1000 to $2000" (that included girls as young as eleven). And it wasn't only San Francisco: in March 1887 the city of San Jose declared its Chinatown a public nuisance and was planning to take action against the Chinese, but two months later Chinatown burned down and the Chinese moved to a new Chinatown far from downtown. In 1888 the very president of the USA, Grover Cleveland, stated that the Chinese immigrant was "an element ignorant of our constitution and laws, impossible of assimilation with our people and dangerous to our peace and welfare."

Chinatown is often depicted as a sort of "Chinese ghetto", but this misrepresents the Chinese immigrants: they actually wanted a town, and built a town wherever they could. That was a significant difference between the Caucasian immigrants and the Chinese immigrants. First of all, the Caucasians were more individualist, whereas the Chinese were more bound to collective life. Secondly, the Caucasians were more likely to be transient, or at least to think in "transient" terms. Trappers, loggers and miners had little interest in thinking long term: trappers moved after the animals they were hunting, loggers moved as forests were depleted, and miners moved as mines dried up. Last but not least, the Chinese were also more likely to know how to build (and how to farm) than the Caucasians. Therefore it is not surprising that the Chinese built Chinatowns wherever they could. It wasn't only an effect of anti-Chinese racism. The other side of the story was that the Chinese wanted to live in a Chinese town, with convenient Chinese services, the use of the lunar calendar and the staging of traditional festivals, and they often imported furniture and kitchenware from China for their homes. While their native customs, clearly different from European customs, fueled prejudice and stereotypes, the Chinese did little to amend or abandon them, clearly valuing them more than social integration and acceptance. Chinatowns were manifestations of a Chinese-American subculture as much a result of social persecution as of anything else. While Chinatown's crime was legendary, in reality it paled compared with the lawlessness of the white mining areas. Between 1849 and 1854 over 4,000 murders were recorded in California, about 1200 in San Francisco alone, and the Chinese were more likely to be the victims than the perpetrators. Chinatowns were, first and foremost, towns.

The Chinese that had already started businesses in California simply continued to expand. In 1890 Sai Yin Chew founded the Precita Canning Company in San Francisco, and the entire management was ethnic Chinese. Produce traveled by horse from the Santa Clara Valley and by train or boat from the San Joaquin County and the Sacramento Delta to the San Francisco cannery.