Water pricing policy is believed to be an efficient method for addressing the water scarcity problem in China. The motivation of this study is to provide a better understanding of how reducing irrigation subsidies impacts farming sectors and rural households. We apply a Computable General Equilibrium model to simulate the irrigation water and irrigation subsidy in 16 provinces. The results show that reducing irrigation has great potential for resolving the water scarcity problem in China, especially for the provinces with high subsidy levels such as Guangdong, Shandong, and Jilin. The declines in farming outputs are significant, and then their producer prices and imports increase. Rural households suffer serious losses in food consumption, particularly for those in Jilin, Guangdong, and Shandong. As for policy recommendation, improving the mobility of cropland should be given greater attention for promoting water conservation, and improving the mobility of agricultural labor could mitigate the losses in the farming outputs and in the food consumption for rural households in most provinces. Reduction in irrigation subsidy as a policy option should be adopted gradually, and then increasing the water demand elasticity should be taken into account when the irrigation water price is close to the full-cost recovery level.