China is the second largest energy consumer in the world. During 1997-2002, China's energy intensity declined by 33%. However, it rose by 10.7% over 2003-2005, and declined by 1.2% in 2006. What induced China's energy intensity to fluctuate so drastically? Industry accounts for approximately 70% of the total energy consumption in China. In this paper, we decompose China's industrial energy intensity changes between 1997 and 2002 into sectoral structural effects and efficiency effects (measured by sectoral energy intensities at two-digit level and including the shifts of product mix in the sub-sector or firm level), using Tornqvist and Sato-Vartia Index methods. The results show that in this period, efficiency effects possibly contributed to a majority of the decline, while the contribution from structural effects was less. During 2003-2005, the excessive expansion of high-energy consuming sub-sectors and the high investment ratio were foremost sources of the increasing energy intensity. Attributed to the government efforts, the energy intensity has started to decline slightly since July 2006. In future, to save more energy, in addition to technical progress, China should attach more importance to optimizing its sectoral structure, and lowering its investment ratio. (C) 2007 Elsevier Ltd. All rights reserved.