Efficiency in land use can be realized at different lev-els.Other things the same and given clearly delineateduse rights，how high a level is attained depends on theintensity of competition.Individuals compete，house-holds compete，firms compete——these represent all theforms of competition traditionally analyzed in econom-ics.In the case of China，we may add that localitieswithin the same layer compete，and because economicpower rest mainly with the xians，competition at thislevel is the most intense.Adding one more layer ofcompetition is，in my view，the chief newidea in the answer to the China question.
A xian is often translated as “county”.That is not cor-rect.In China，cities are very large.An average citycontains 8.6 xians.At the end of 2006，the official countwas 2,860 xians or the equivalents in the whole country,so that there were this number of entities which possess ahigh degree of autonomy regarding landuse and relatedeconomic matters.The average area of the xian is about3,000 square kilometers with a large variance.Sincepopulation density is lowin western China，the xians there tend to be very large in area.In the populous east of the country，a xian is typically in the neighborhood of1,000 square kilometers in size.I estimate the averagepopulation per xian to be 450,000，but here again thevariance is large.31
The question remains——the central question remains:Why is competition so intense among xians？Is it not true that in other countries there are different layers oflocalities too？Exactly what are the fundamental ele-ments in the contractual structure of the system of China that generates intense competition，and which in turnsustains economic growth at the spectacular rates wehave been observing？
Ⅵ.The Sharecropping Nature of the Xian System
Economic reformin China can be divided into phases.The first dates from around 1980 to Deng Xiaoping’s31 The granting of economic power to xians via responsibilitycontracts has given rise to an interesting debate during the past few years.Should cities in China be abolished？The pros arguethat while economic power rests with the xians，politically cityofficials are ranked higher，so that unavoidable conflict would emerge which interfere the operation of the system.This is acomplicated issue which I did not tackle during my research.Beginning fiscal year 2007，xians report financial matters direct-ly to provincial governments，skipping the cities.In other politi-cal or administrative matters，a city is still ranked higher than axian.
retirement in 1992.This phase involves mainly the delineation of rights in terms of property to replace the earlier practice of comrade ranking，with the high pointbeing reached on December 1，1987 when Shenzhen auc-tioned land for the first time in the country.This involved selling a private long lease to use land for a spe-cific purpose without private ownership.City of ficialstold me they were following my advice: I had earlier sug-gested that selling land was just about the only way fundscan be obtained to develop the city，and that they should all owprivate developers to exploit private expertise.32
During this first phase，economic development was concentrated in the Pearl River basin，in the south of the country.This was a relatively neglected and underratedregion during the earlier regime，with fewlarge stateenterprises or state-protected monopolies.Business menand investors fromHong Kong led the way，bringing incapital，technology，and management skills.Comparedto the Yangtze River basin where powerful state enter-prises barred competition，down in the south days andsometimes hours were all that it took to obtain a privatebusiness license.
The impact of the market began to be felt in the Yangtze River basin around 1993.Surprisingly，in only eight or nine years this area overtook the south in just
【32】In June 1986，I published an article discussing three advan-tages of selling land.Shengzhen officials liked that article andinvited me to a meeting in the spring of 1987.张五常，《出售土地一举三得》，一九八六年六月二十五日于《信报》发表，其后转刊于《再论中国》。
about all the vital economic statistics.This marked thesecond phase of economic reformin China，when ZhuRonji was in charge of the economy.The period 1993 -2000 included some trying times，beginning with run-away inflation，massive corruption，the collapse of the RMB，followed by severe restrictions on borrowing andspending，crackdown on corruption，and finally by defla-tion and the collapse of the real-estate market.Yet itwas in the midst of these difficulties that the YangtzeRiver basin exploded in growth，with effects whichextended all the way into the mid-western part of the country.One may cite a number of reasons for thismiraculous development，but in my viewthe key factorwas that the xian-competing systemfinally emerged in awell-defined form，and that it began to deliver results.
The odds were against the Yangtze River basin over-taking the Pearl River basin under the economic climatedescribed above,33 and yet this was what happened.The