This paper explores the distortionary effects of the 1994 reform of the system of tax revenue sharing between the central and local Chinese govements and its interaction with the incentives for local officials to promote local economic growth.One of the major distortions was to encourage local govements to rely on land finance in their efforts to promote urbanization and growth.This paper analyzes the causes and effects of increasing dependence on land finance and provides constructive suggestions for solutions to the problems that over reliance on land finance have generated,including their distortionary impacts on the urbanization process.