This paper estimates China’s water utilization efficiency using the directional distance function to take into account the environmental degradation affecting the economy. We further analyze the spatial correlation and the factors influencing the utilization efficiency using spatial panel data models. The results show that water utilization efficiency in China differs between provinces and regions. For example, water utilization efficiency in the eastern coastal provinces is significantly higher than that of inland provinces. The pattern of spatial auto-correlation Moran’s I index presents significant spatial auto-correlation and evident cluster tendencies in China’s inter-provincial water utilization. Factors that contribute to water utilization efficiency include economic development, technological progress, and economic openness. Negative factors affecting water utilization efficiency arise from industrial structure, government interference, and water resources endowment. In addition, the price of water resources is insignificant. The improvement of water utilization efficiency is essential to sustainable economic development. To raise the utilization efficiency of water resources, China should focus on transforming its industrial restructure, advancing technological development, enhancing economic openness, and encouraging entrepreneurial innovations. Moreover, establishing a mechanism to encourage water conservation and reduce wastewater pollution will further increase water utilization efficiency.
