The long-awaited plan comes as the central government steps up its "war on pollution" after years of industrial development that have left one-third of China's major river basins and 60 percent of its underground water contaminated.
Growing public discontent over the environmental degradation has led to increasing scrutiny of industrial polluters. China's largest energy company China National Petroleum Corporation
last month agreed to pay 100 million yuan ($16 million) in compensation after it was accused of leaking benzene into the water system in Lanzhou in northwest China.
But experts say much more needs to be done to protect China's scarce water resources.
"Water is the bottleneck to China's industrial development. Coal miners and factories located in western regions are suffering from water shortage, and if their discharge of dirty waste water is not treated, the pressure will increase," said Alex Zhang, president of McWong Environmental Technology, a United States-based water technology company.
The new plan - published by the State Council, China's cabinet - aims to raise the share of good quality water, ranked at national standard three or above, to more than 70 per cent in the seven major river basins, and to more than 93 percent in the urban drinking water supply by 2020.
Impact on water will become a key consideration in future industrial expansion, said the cabinet, adding that it will restrict building of petrochemical and metal smelting factories along major river basins.
"We will fully consider the capacity of our water resources and environment, and determine city planning, project location, population and industrial output according to water reserves," it said.
China currently controls water usage by allocating volume permits to each province, and requests for additional water for new projects will be refused in regions already exceeding their allocated quotas, said the cabinet.
The government is targeting a cap on overall water consumption at 670 billion cubic metres by 2020, and wants to cut agricultural water use by more than 3.7 billion cubic metres by improving irrigation efficiency by 2018.
Tiered pricing for residential water users will be rolled out nationwide this year to encourage conservation. Non-residential users will be charged progressive fees for overshooting quotas under a plan to enter into force by 2020.
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