Abstract This paper reviews the current situation of bioenergy development in China, particularly on its relationship to sustainable rural development. It argues that the current government strategy, investment policy and industrial interest are over-emphasized on biomass-burning power generation as part of the clean energy development trajectories, which may not lead to the most cost-effective outcomes in terms of investments, resource use and social development objectives. It points out that there are large potentials in developing and disseminating household-based biomass technologies in rural areas, especially with energy-efficient modern biomass stoves, which can produce far more economic, social and environmental benefits than biomass power plants. It is a decentralized solution to use renewable energy resources for meeting multi-objectives. It is suggested that key incentive policies be provided by the government to encourage this technological transition, or the leapfrogging from using traditional household stoves towards modern biomass stoves, which will lead to a win–win situation in global, regional and local environmental protection, sustainable resource management and related social benefits, particularly for the poor in remote communities. Six policy recommendations are made: (1) financial schemes development; (2) preferable tax and carbon tax; (3) regulatory policy reform; (4) service industry support; (5) market research, training and capacity building for key stakeholders; (6) development of methodologies and standards for CDM projects. The potential co-benefits brought up by this massive biomass technology transition will bring new perspectives to realizing Millennium Development Goals (MDGs) and global CO2 emissions reduction targets in China, and also set an example to other developing countries.