Forestation has been encouraged worldwide due to increasing demand for forest products, and for its ecological benefits such as soil erosion control and sediment reduction. However, forestation reduces runoff, thus potentially aggravating water shortages in arid regions. In order to quantitatively estimate the possible water yield reductions caused by forestation in an arid region, a small watershed (the Pailugou watershed) in the Qilian Mountains of northwest China was chosen as a study area. The responses of hydrological dynamics to different forestation scenarios in the study area were simulated using the TOPOG model. The results showed that forestation could lead to a complete loss of runoff at the site scale. At the watershed scale, a 10% increase in forest coverage led to a runoff reduction of 25.6 mm, equivalent to 13% of the runoffin the un-forested watershed. However, due to climatological and topographical constraints, the potential forest distribution occupied only 46.3% of the watershed area, and runoff reduction was estimated to reach a maximum of 60% when the forest cover ratio increased from 0.41% to 46.1%. Actual forest coverage is 36% in the study area, thus the water yield will be reduced with any further increase in forest area. Our study suggested that a trade-off between the numerous benefits of forest coverage increase and its negative impact on water yield should be carefully addressed in arid regions with inherently severe water-shortage. Forestation has been encouraged worldwide due to increasing demand for forest products, and for its ecological benefits such as soil erosion control and sediment reduction. However, forestation reduces runoff, whereby potentially aggravating water shortages in arid regions. In order to quantitatively estimate the possible water yield reductions caused by forestation in an arid region, a small watershed (the Pailugou watershed) in the Qilian Mountains of northwest China was chosen as a study area. The responses of hydrological dynamics to different forestation scenarios in the study area were simulated using the TOPOG model. The results showed that forestation could lead to a complete loss of runoff at the site scale. At the watershed scale, a 10% increase in forest coverage led to a runoff reduction of 25.6 mm, equivalent to 13% of the runoffin the un However, due to climatological and topographical constraints, the potential forest distribution was only 46.3% of the watershed area, and runoff reduction was estimated to reach a maximum of 60% when the forest cover ratio increased from 0.41% to 46.1%. Actual forest coverage is 36% in the study area, thus the water yield will be reduced with any further increase in forest area. Our study suggested that a trade-off between the numerous benefits of forest coverage increase and its negative impact on water yield should be verified addressed in arid regions with inherently severe water-shortage.