The overall goal of our paper is to better understand the development of groundwater markets in northern China. In particular, we focus on the factors that determine the development of groundwater markets in our attempt to explain their 'breadth' and 'depth.' Based on a survey of 24 randomly sampled villages and 50 randomly sampled tubewells in two provinces (Hebei and Henan Province) in 2001 and a field survey of 68 randomly sampled villages in 4 provinces (Hebei, Henan, Shanxi, and Shaanxi) of northern China in 2004, our results show that groundwater markets in northern China have emerged and are developing rapidly. Our results show that groundwater markets in northern China are informal and localized. The markets have developed in a way in which they appear somewhat similar to markets that are found in South Asia. However, groundwater markets differ from markets in South Asia in other ways-water sellers discriminate in pricing and they almost always work on a spot-market, cash basis (that is, there are no share or labor sharing arrangements as found in South Asia). Econometric results show that the privatization of tubewells is one of the most important driving factors that encourage the development of groundwater markets. Increasing water and land scarcity are also major determinants that induce the development of groundwater markets.