The purpose of this presentation is to better understand water management reform in China's rural communities, focusing on the effect of incentives to water managers on the nation's water resources and the welfare of the rural population.  Based on a survey study in the Yellow River Basin, our findings show that Water User Associations and contracting have begun to systematically replace traditional forms of collective management.  The analysis demonstrates, however, that it is not a nominal implementation of the reform that matters, but rather it is a creation of new management institutions, which provide water managers with monetary incentives that leads to water savings.  Importantly, given China's concerns about national food production and poverty alleviation, the reductions in water use, in our sample sites, do not lead to declines in either production or farmers' income.