During the past 20 years, economic reforms undertaken by China have led to rapid economic growth, as well as increasing environmental problems. In particular, economic development in the Eastern Region has been associated with severe environmental degradation. For example, the Huaihe River has been badly polluted through this process of development, air quality is poor, and red tides have been observed along the southeastern coastline. In the 10th five-year national development plan (2001-2005), the Chinese government is focusing on promoting economic growth in the Western Region, since it is relatively underdeveloped compared to the east. However, the government wishes to ensure that economic development in this region is accompanied by social development and does not further compromise the environment. To realize a future path of sustainable development that avoids the costs of environmental degradation, the government has chosen to emphasize environmental regulation and protection in the development of the Western Region. It has also emphasized research on the linkages between the environment and development. However, the questions of how the required environmental investments will be financed (Environmental Finance), the appropriate balance between public and private spending, and understanding the role of Environmental Finance have recently emerged as key issues. To this end, China is working to enhance cooperation with foreign partners. For example, in November 2000, China and the OECD organized a special forum on environmental issues facing China, including the role of Environmental Finance. The challenge of designing an appropriate strategy for the development of the Western Region provides a good opportunity to explore the use of Environmental Finance in China.