This paper presents a tourism destination development sequence for Dali, Yunnan Province, China. The development of Dali highlights limits in the power of the local government as the lead stakeholder, which took a top-down approach to economic development. The government sought to address increasing control of the tourism sector by external tour operators through increasing its own control of local tourism attractions. This approach has been only partially successful in reducing distortions in the tourism channel. The origins of these distortions are described and analysed. A number of additional responses are suggested to improve the local benefits obtained from the inflow of tourists to this new destination area including development of a more market oriented competitive strategy that seeks to co-opt stakeholders into collaborative activities.