China's water abstraction policies are significant for illustrating the application of market-based instruments in a transitional and developing country and for shedding light on improving China's water management system. This article presents a new approach to analysing applications of market-based instruments for water resources in China. Expanding the analysis beyond a rational choice approach, it demonstrates the institutional dimension of policy implementation at the local level in China. Four peculiar features of China's water institutions influence local governments in dealing with water abstraction differently from how regulators might expect. This explains local governmental failures and the implementation of water abstraction policies in several ways, including the setting of charges at low levels, a lack of necessary monitoring and sanctions, few incentives to collect charges diligently, and failure to provide accessible information for the public.
