The LED market in the world's most populous country is forecast to reach $6.9 billion next year on its way to $11.1 billion by 2015, equivalent to a five-year compound annual growth rate of 17.7 percent.

"Driven by markets including backlights for liquid crystal display (LCD) TVs and street lighting, LEDs have become a hot item for manufacturing in China and also an attractive investment segment in the country," said Vincent Gu, senior analyst for China electronics research at IHS. "Moreover, official government commitments to the industry appear to be paying off dividends."

Exceedingly broad, the Chinese LED market covers a range of applications including LED displays, traffic signals, automotive use, LCD backlighting, handset key pads, digital still camera flashlights, decorative lighting, street lighting and general illumination.

Street lighting will be the biggest segment, reaching $1.5 billion this year and anticipated to hit $1.8 billion in 2012. The LCD backlighting market is also headed for strong growth on the strength of the rapid adoption of LEDs for large-sized LCD TVs and laptops, generating $1.8 billion in 2015, up from $713 million this year.

A new demand driver for LEDs in the medium to the long term will be the general lighting market.

Given the global trend to reduce carbon emissions, China demand in the general lighting segment will be strong for LEDs, which offer low-power consumption and are environmentally safe. LED shipments for general lighting will make up 15.5 percent of the total LED market this year, IHS data shows.

Despite the current popularity of LEDs in China, the domestic LED industry is still in its infancy compared to its counterpart in thriving LED-focused countries such as the United States and Taiwan.

Some reasons why China trails in the field include lagging technological capabilities currently available in the country as well as a paucity of adequately experienced management teams and R&D engineers to lead the way. Furthermore, the lack of Chinese intellectual property in core and upriver segments - such as in LED wafers - is a serious concern.

Still, China's LED players enjoy ample funding from local and government sources, which should help domestic entities capture the large Chinese end demand for LEDs in the future. To date, local governments in China subsidize at least 70 percent of the purchase price for metal organic chemical vapor deposition (MOCVD) equipment employed in LED manufacturing - a percentage translating into some $1.5 million for each machine. Furthermore, tax and utility payment benefits are offered to encourage investments in the domestic LED industry, proving to be an additional boon for local players.