China has experienced unprecedented urbanization and associated rural depopulation during recent decades alongside a massive increase in the total population. By using satellite and demographical datasets, we here test the hypothesis that urbanization and carbon neutrality are not mutually exclusive and that sustainably managed urbanization may even be an integral part of the pathway to reduce atmospheric CO2. We show that, although urban expansion caused an initial aboveground carbon loss of −0.02 PgC during 2002–2010, urban greening compensates these original losses with an overall balance of +0.03 PgC in urban areas during 2002–2019. We further show that a maximum increase in aboveground carbon stocks was observed at intermediate distances to rural settlements (2–4 km), reflecting the decreased pressure on natural resources. Consequently, rural areas experiencing depopulation (−14 million people yr−1) coincided with an extensive aboveground carbon sink of 0.28 ± 0.05 PgC yr−1 during 2002–2019, while at the same time only a slight decline in cropland areas (4%) was observed. However, tree cover growth saturation limits the carbon removal capacity of forests and only a decrease in CO2 emissions from fossil fuel burning will make the aim of carbon neutrality achievable.