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With the already huge and growing amount of greenhouse gas emissions and a great deal of low-cost abatement options available, China is widely expected as the world's number one host country of clean development mechanism (CDM) projects. But, making this potential a reality represents a significant challenge for China, because there has been a general lack of awareness by both the Chinese government and business communities, institutional structure, and implementation strategy. This has raised great concern about China's ability to compete internationally for CDM projects and exploit fully its CDM potential. This paper aims to address how CDM projects will be effectively implemented in China by examining the major CDM capacity building projects in China with bilateral and multilateral donors, the treatment of low-cost, non-priority CDM projects, and how a system for application, approval and implementation of CDM projects is to be set up in China and what roles the main institutional actors are going to play in the system. We conclude that these capacity building assistances, the establishment of streamlined and transparent CDM procedures and sound governance, and the lessons learned and experience gained from the implementation of the CDM project in Inner Mongolia and the two Prototype Carbon Fund (PCF) projects will make China well positioned to take advantage of CDM opportunities. Moreover, in order to further exploit its CDM potential, we recommend that China should well define its sustainable development objective of the CDM, disseminate CDM knowledge to local authorities and project developers as sectorally and geographically wide as possible, and get at least two domestic legal entities accredited as designated operational entities. By taking these ongoing capacity building projects and the recommended actions, and gaining experience from real practice, it is thus expected that a much greater percentage of carbon credits is likely to come from CDM projects in China over the next several years as the Kyoto Protocol enters into force.