Look to the California system of water management and allocation to improve the allocation of China’s water resources. Incentivize water market based pricing schemes and permit system through a hybrid laissez-faire water bank and administrative mediation, tax, and license. This paper investigates the optimal cost-benefit coefficient of the California Water Bank with an eye to manage China’s water resources. Water available by volume has a price, while water pollution as measured by quality standards has a cost. Consumptive users pay for water by volume and quality, while water polluters pay for water treatment. In 2005, the PRC’s Ministry of Water Resources (MWR) published an important opinion, charging water basin management teams to "Give full play to the market mechanism for allocation of water resources." In this thesis I have taken the government’s challenge to heart by investigating California’s market mechanisms from a legal standpoint. I hope it serves Chinese policy makers to reform water markets.