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China initiated the largest forest conservation programs in the world. Chinese forest policies also contributed to increasing forest/tree cover in Yunnan province, Southwest China. We mapped forest cover in Yunnan, Mekong region using satellite imagery. We reconstructed the forest transition curve through narratives since the Great Leap Forward that started in 1958, as well as data from socioeconomic census since 1990s. Our results suggest that the increase in tree cover at the end of the last century was initiated by government policies that encompass regulative approaches as well as incentive payments for tree planting on sloping land, as well as market-driven plantation economy. Local trajectories of forest cover change hence resulted from a combination of exogenous policy-induced incentive payments and endogenous adaptation of land use strategies to changing market conditions. While policies facilitated the increase of tree cover in Yunnan, the degradation of natural forests often continued unabated. Local differences in factor endowments and the uneven geographic distribution of policy support contributed to considerable variation in the pathways to the forest transition, the shape of the forest transition curve, and the environmental and economic outcomes among villages. A better understanding of these processes is paramount to design incentive schemes that stimulate sustainable land use transitions.