China's new Classification-Based Forest Management (CFM) is a two-class system, including Commodity Forest (CoF) and Ecological Welfare Forest (EWF) lands, so named according to differences in their distinct functions and services. The purposes of CFM are to improve forestry economic systems, strengthen resource management in a market economy, ease the conflicts between wood demands and public welfare, and meet the diversified needs for forest services in China. The formative process of China's CFM has involved a series of trials and revisions. China's central government accelerated the reform of CFM in the year 2000 and completed the final version in 2003. CFM was implemented at the provincial level with the aid of subsidies from the central government. About a quarter of the forestland in China was approved as National EWF lands by the State Forestry Administration in 2006 and 2007. Logging is prohibited on National EWF lands, and their landowners or managers receive subsidies of about 70 RMB (US$10) per hectare from the central government. CFM represents a new forestry strategy in China and its implementation inevitably faces challenges in promoting the understanding of forest ecological services, generalizing nationwide criteria for identifying EWF and CoF lands, setting up forest-specific compensation mechanisms for ecological benefits, enhancing the knowledge of administrators and the general public about CFM, and sustaining EWF lands under China's current forestland tenure system. CFM does, however, offer a viable pathway toward sustainable forest management in China.