It replaced the semi-automatic Type 56 carbine as the standard service rifle of the People's Liberation Army during the 1980s.

The 1979 Sino-Vietnamese War exposed the limitations of the Type 56 carbine and Type 56 assault rifle, prompting the Chinese state to sponsor the development of a more modern service rifle incorporating features of both these weapons.

[8] The Type 81 incorporates elements of the Dragunov, SKS, and AK series of rifles.

The design criteria it met included accuracy of 1.78 in (4.5 cm) R50, 50% of the hits within a 1.78 in (4.5 cm) diameter at 100 m (330 ft); improved controllability in full-automatic; the same reliability of the AK but a longer service life to approximately 20,000 rounds; and the ability to use AK and SKS production tooling at the time.

[11] A horizontal crossbar was added to cover the rear sight notch, as the finish on the non-hooded rear sight leaf on the Type 56 assault rifles were found to be wearing off during service in the Sino-Vietnamese conflicts (1979–1991), creating glares that disrupts the shooter's aim.

[13] One such attempt to market Picatinny rails for the Type 81 came from Bao Wa, a Hong Kong-based law enforcement supplier.