This paper addresses two questions concerning the relationship between state policies and environmental transformation in China in the past four decades. The first one deals with the promotion of agricultural productivity since the 1980s; the second, the water conservation measures as a response to the water crisis that peaked in the early 2000s. We had chosen Minqin County in northwestern China, one of the most fragile arid oasis systems in the world, as the study area. We found that the irrigated farmland in up and midstream areas had greatly expanded between the 1980s and the 2000s under the government policy of promoting commodity grain production. As a result, the runoff flowing into Minqin Oasis had reduced 80 % from the 1950s to early 2000s. Irrigated farmland in Minqin Oasis expanded 15.76 % from 1995 to 2000. In the 2000s, because of the changing policy discourse that has shifted from productivity to conservation, a new set of environmentally framed policies has restructured agricultural production in Minqin by 2005. These new policies included establishing a watershed-level water management system, promoting drought resistant crops, introducing water-saving irrigation measures, and forced reduction of irrigated farming acreage. These policies have produced positive results in terms of greater coverage of vegetation, rising ground water table, and reduction of evaporation. Nevertheless, new policies have also brought new challenges to both farmers and policy makers to keep the balance between poverty reduction and environmental sustainability in Minqin Oasis in the historically poor region in China's Northwest.