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As one of the key issues in China’s sustainable development, rapid urbanization and continuous economic growth are accompanied by a steady increase of water consumption and a severe urban water crisis. A better understanding of the relationship among urbanization, economic growth and water use change is necessary for Chinese decision makers at various levels to address the positive and negative effects of urbanization. Thus, we established a complete decomposition model to quantify the driving effects of urbanization on economic growth and water use change for China and its 31 provincial administrative regions during the period of 1997–2011. The results show that,(1) China’s urbanization only contributed about 30% of the economic growth. Therefore, such idea as urbanization is the major driving force of economic growth may be weakened.(2) China’s urbanization increased 2352×108 m3 of water use by increasing the economic aggregate. However, it decreased 4530×108 m3 of water use by optimizing the industrial structure and improving the water use efficiency. Therefore, such idea as urbanization is the major driving force of water demand growth may be reacquainted.(3) Urbanization usually made greater contribution to economic and water use growth in the provincial administrative regions in east and central China, which had larger population and economic aggregate and stepped into the accelerating period of urbanization. However, it also made greater contribution to industrial structure optimization and water use efficiency improvement, and then largely decreased total water use. In total, urbanization had negative effects on water use growth in most provincial administrative regions in China, and the spatiotemporal differences among them were lessened on the whole.(4) Though urbanization helps to decrease water use for China and most provincial administrative regions, it may cause water crisis in urban built-up areas or urban agglomerations. Therefore, China should construct the water transfer and compensation mechanisms between urban and rural areas, or low and high density urban areas as soon as possible.