It turns out that at the conference on water management in Africa hold in Mauritius, I met someone who could answer this question: Prof. Meine Pieter van Dijk from UNESCO-IHE, Delft, the Netherlands. He has been running extensive surveys on water management in China. He has looked at which laws and legislation have an impact on the ground, and how the farmers on the ground interpret these laws and legislation. He found that even if in the past the government used to organize and control everything, farmers in China today organize themselves in informal institutions to address the gaps when laws and legislation do not reach the ground. There is lots of scope to understand these informal institutions and bottom up initiatives better and take them into account in policy recommendations.
Watch Meine's key points here :