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We investigate conceptually and empirically the role of economic incentives in the primary land allocation in China in recent years. A theoretical analysis demonstrates how recent fiscal and governance reforms give rise to land conversion decisions and long run urban spatial sizes much like those generated by competitive land markets with private land ownership. An econometric investigation of Shanghai and the provinces surrounding it demonstrates the presence of rent gradients, often used as an indication of the presence of land markets. It thus appears that economic forces have continued to exercise dominant influence over primary land allocations in spite of recent administrative restrictions on land conversion. These rent gradients are strongest in the most economically developed portions of the study region and weakest in the least economically developed. Urban land values exceed agricultural land values by a considerable margin, suggesting that rates of urbanization will continue to be rapid. The estimated rent gradients also suggest that much of this region will eventually become completely urbanized.
