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Governance has recently been recognized as a crucial factor in sustainable urbanization. China, as a developing nation experiencing rapid urbanization, is facing governance challenges in urbanization due to changing socio-economic environment. However, the existing hierarchical governance mechanisms of urbanization, characterized by centralized decision-making, soft cost constraints and distorted incentives, makes it difficult to adapt to transition to sustainable urbanization. Thus, the development of governance mechanisms and capacities that are aligned with the urbanization transformation is a significant theoretical and practical issue in China. Nevertheless, the micro transformation mechanism of urbanization governance in China has not been analyzed systematically. In Chengdu, a town recently explored a contract-based governance mechanisms in urbanization that uses contracts as a means to encourage collaboration among various stakeholders in the urban construction and operation. This practice provides a new viewpoint on urbanization transformation. To explain its effectiveness and feasibility, the article develops a framework of "property rights-governance-performance". The results indicate that contract-based governance mechanisms, characterized by negotiated decision-making, cost constraints, value creation and benefit sharing, performs better than hierarchical governance mechanisms in governing urbanization. The transformation from hierarchical to contract-based governance mechanisms enhances the understanding of stakeholder interactions and contractual issues in urban governance, while also providing insights into the urbanization transition. • Urbanization governance mechanisms aligned with the urbanization stage is crucial to achieve sustainable urbanization. • A comparative analytical framework and case study approach are used to explain the effectiveness of contract-based governance mechanisms. • Contracts facilitate property rights transactions, integrate resources and interests, and promote collaboration. • The effectiveness of contract-based governance mechanisms lies in negotiated decision-making, cost constraints, added-value creation and benefit sharing. [ABSTRACT FROM AUTHOR]