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What hurdles lie in the path of the Chinese government's plan to introduce water trading? This question is addressed by reviewing lessons from establishing water markets in Australia, and then assessing an early scheme to create them in China. In Australia, markets in water opened up over several decades, with gradual recognition of what was needed to avoid negative third-party effects. Trading there is now crucial: in drought years nearly half the water used by farmers is traded. Australia's experience throws light on the key requirements for a water market – though markets in China will, naturally, be fashioned to suit its own conditions. The pilot work by Tsinghua University in Gansu Province has led the way in having trading at the local level in China. Compared with Australia, however, rights are not as tradeable, metering is poor, and plots are tiny. Trading has mostly been by water user associations, made up of several hundred farmers, but this dampens the incentives that make markets effective – and can upset individual farmers. Possible ways past these hurdles are discussed. [ABSTRACT FROM AUTHOR]