Urban sprawl has been at the centre of current debate on urban structure. Compared to the rich literature on urban sprawl in Western cities, relatively little is known about the physical consequence and the causes of urban sprawl in China. In China, for peasant collective-owned land (COL), land use right cannot be sold, transferred or leased for non-agricultural construction’. COL could be developed until it is acquired and leased out by the government. Through the process of land acquisition, the peasants could only get the compensation for 30 years' average of annual agricultural production value in addition to compensation for attachments, crops and vegetables which sometimes could hardly support the life of peasants who lost their land. To compensation for the peasants’ loss, the government would leave 10-15% of the acquired land to peasant collectives as Collectively Owned Economic Development Land (COEDL), allowing it used for industrial or commercial purpose. However, development of COEDL manifested to have low development density, quality and output. With a property rights approach, this research evaluates the development process of COEDL in Guangzhou. It has been revealed that high cost to obtain the permit of land use change (nongzhuanyong zhibiao), and to provide infrastructure and public facilities reduce the incentives of peasants to use COEDL legally and more efficiently. Furthermore, as COEDL is forbidden to transfer or mortgage, the financing ability of peasant collectives is thus impaired severely, allowing them only low investment on development. Use of COEDL thus contributes to urban sprawl in China.