The 1998 floods in China triggered the implementation of the Natural Forest Conservation Program (NFCP) which includes: (i) a logging ban over state-owned natural forests in order to protect the deteriorating natural environment, and (ii) strategies for the establishment of commercial plantations and relocation of laid-off forest workers, with the aim of mitigating the negative socioeconomic impacts of the logging ban. In this paper, Sichuan province is used as a case study to analyze the disincentives faced by local communities in developing commercial plantations and the institutional failure to address the disincentive issue. Insight on the necessity of ’real participation’ of local communities has been provided, and ways to create incentives as well as institutional rearrangement has been explored and recommended. The 1998 floods in China triggered the implementation of the Natural Forest Conservation Program (NFCP) which includes: (i) a logging ban over state-owned natural forests in order to protect the deteriorating natural environment, and (ii) strategies for the establishment of commercial plantations and relocation of laid-off forest workers, with the aim of mitigating the negative socioeconomic impacts of the logging ban. In this paper, Sichuan province is used as a case study to analyze the disincentives faced by local communities in developing commercial plantsations and the institutional failure to address the disincentive issue. Insight on the necessity of ’real participation’ of local communities has been provided, and ways to create incentives as well as institutional rearrangement has been explored and recommended.