Shitong Qiao is the Ken Young-Gak Yun and Jinah Park Yun distinguished professor of law at Duke University. This past August, just weeks before Xi Jinping was set to sit down with Donald Trump, Beijing carried out the most significant change to how Chinese cities pay their bills in three decades.

Since the mid-1990s, the wealth of a Chinese city hall rested on a simple transaction: sell the land, build the road, sell more land. A local government would seize rural land on its outskirts and sell the development rights to a builder. Developers, in turn, sold apartments to families years before a single wall went up, using those advance payments to finance the next project down the road.

It was, for a long time, a remarkably effective machine. It moved hundreds of millions of people from villages into modern apartment blocks and gave local officials a fiscal lifeline Beijing never had to fund directly. It also financed subways and skyscrapers that make America's infrastructure look decades out of date, and subsidized industrial parks that turned Chinese manufacturers into some of the world's most dominant exporters, from solar panels to electric vehicles.

Then the highly leveraged machine finally broke during the COVID pandemic. Home prices have been falling significantly every year since 2021. Developers have defaulted on debts they can no longer roll over, or, worse, have gone bankrupt. Local governments that once relied on land sales for a large share of their budgets have watched that revenue collapse alongside the market. Even Shanghai, the country's richest city, ran a first-quarter deficit this year, its worst in nearly a decade outside the pandemic years.

The result is an economy stuck in a low gear. Households, watching their biggest asset lose value, have pulled back on spending. Beijing's response has been to lean harder on the one thing still working: pushing more Chinese goods out into the world, which has increased the risk of trade disputes. Despite robust export growth, China's job market remains under real strain, with severe unemployment among young people a particular concern. Roughly 44% of the broader workforce, by one widely cited estimate, now works in "flexible employment" without a guaranteed wage or contract.

Recently, the Politburo publicly said China must "attach great importance to the difficulties and challenges facing the economy." For years, Beijing's own economic plans have called for shifting growth toward domestic consumption. But the land-finance model worked against that goal: Local governments were rewarded for development and investment, not for cultivating consumers. Finding a politically viable alternative source of revenue for local governments proved harder. Property tax was the obvious fix on paper: since at least the early 2010s, the central government has piloted it in a couple of cities, signaled plans to legislate it nationwide, and quietly shelved it each time, wary of taxing the middle class, particularly during a prolonged economic slowdown.

A view of unfinished residential buildings developed by China Evergrande Group on the outskirts of Shijiazhuang, Hebei province, in early 2024.

For a long stretch, China treated the symptoms without addressing the disease. It has passed a series of stimulus measures, including, most recently, pumping 360 billion yuan ($54 billion) of fresh capital into eight state banks and insurers, on top of a 500 billion yuan exercise last year. That's real money, but the financial equivalent of a painkiller, not a cure.

China's economic problem requires fundamental institutional reforms. That finally started this August, when Chinese regulators announced a series of reforms that, taken together, reshaped how Chinese local governments are funded. Two are especially significant.

The first cuts off the leverage that powered the old model. Presale, the practice of collecting a buyer's money years before a single wall goes up, barely exists in American real estate. In China, it financed the housing boom. Its costs are now plain: developers used homebuyers' mortgage payments to finance construction elsewhere, leaving many buyers holding contracts for apartments that were never finished. New rules discourage presale altogether, requiring, among other measures, that a building's main structure be topped out before a developer can even apply for a presale permit. It is a deliberate deleveraging of the industry, and it closes off any realistic path back to the old, faster-turnover model.

The second redraws the division of taxation power between Beijing and local governments -- the first time Beijing has ceded real taxation power to localities since the 1994 tax-sharing reform that set up the current system. China's consumption tax has always belonged exclusively to the central government. In late August, the State Council told the national legislature it was drafting a plan to send that revenue to local governments instead, and to collect it at the point of sale rather than the point of production. That would let a city's tax base track where people actually spend money rather than where goods happen to be made.

This reform significantly changes what local officials work for every day. Under the old system, the fastest path to revenue ran through more land sales and more construction, whether or not anyone particularly wanted to live there. Tying revenue to consumption instead gives local governments a real stake in keeping shops open and paychecks flowing, not just in courting the next developer.

Together, these measures mark a genuine shift in what Chinese local government finance is built on, away from a one-time land sale and toward revenue tied to the ongoing economic life of a place. It will not fix everything. The reforms say nothing about an aging, shrinking workforce or the mountain of debt local governments and their financing vehicles built up in the past decades. Nor do they come close to replacing what land sales once provided, which is one reason a property tax on homeowners -- the option Beijing has shelved again and again -- may not be off the table for good.

None of that should obscure what did happen. China has sent local governments its clearest signal yet that the old land-and-leverage playbook is over, and handed them a new source of revenue tied to consumption and commerce rather than production and investment. Whether officials actually follow that signal will shape more than city budgets.

Without land money to subsidize them, factories will have less reason to overproduce for export, easing the flood of Chinese goods into international markets. Local governments, meanwhile, might finally have reason to address the demands of domestic consumers. Either shift would ease, though not resolve, one structural source of trade tension between Beijing and Washington. That is a modest, overdue and genuinely hopeful start, for China and for everyone doing business with it.