China, like many countries, is experiencing an unprecedented rate of urbanization. Urbanization is usually thought to intensify inter-sectoral water conflicts. In contrast, this paper considers urbanization as part of a viable solution to the problem. By evaluating water consumption, or depletion, in terms of actual evaporation and transpiration, as opposed to the amount withdrawn from water sources, this paper argues that urbanization has a positive role to play in lessening inter-sectoral water competition and in reversing groundwater declines. At the regional scale, urbanization can help achieve these goals by replacing some agricultural land use, particularly under two conditions: (1) both the industrial and agricultural sectors adopt water-saving technologies, and (2) urban wastewater and runoff are treated and reused directly in agriculture or indirectly through artificial recharge. Combined, the two conditions must result in a net decrease in water consumption at the regional scale. These points are illustrated with a case study of rural Luancheng County and adjacent industrialized Shijiazhuang City in Hebei Province. A water-balance approach provides a simple, quantitative framework for evaluating the potential for various land-use mosaics to stabilize groundwater levels.