(FORTUNE Magazine) – ONE OF CHINA'S MOST CELEBRATED TOURIST ATTRACTIONS--AND possibly its most beautiful--is a 52-mile stretch of the Li River, from Guilin to Yangshuo. Striking rock formations with names like "Nine Dragons Playing in the Water" and "Yearning for Husband's Return" watch over the winding river like sentinels. Fishermen float by on bamboo rafts as cormorants circle hungrily above. "He who sails along the Li River," a Chinese poet wrote, "finds himself boating in a sweet dream."

Surrounded by the river's clear water and the lush landscape it sustains, it is difficult to imagine that a few hundred miles north, China is facing a water shortage that threatens the continued progress of its economic development. Or that more than 90% of the rivers running through its cities have been seriously polluted by billions of tons of untreated

sewage and industrial waste. According to a 2003 report by the Chinese Academy of Engineering, 21 cities along the Yellow River registered the highest levels of measurable pollution. That has resulted in mercury contamination of rice, increased incidence of intestinal cancer, and rivers devoid of aquatic life.

Water has long been an essential ingredient of Chinese life--as James Nachtwey's photographs of a 700-year-old irrigation system in Guangxi province and a water park in Shanghai attest. But with less and less to go around (the nation's arid north has 70% of the population and 66% of the farmland but only 20% of the water) and with both water consumption and pollution increasing, the outlook isn't promising. The government has embarked on a $60 billion project to divert water from south to north, a dam-building program that dwarfs any in history, and a belated effort to stanch the flow of pollution. The fishermen on the Li River can only hope these initiatives will be enough to prevent the sweet dream of Guilin from becoming a nightmare. -- Nicholas Stein