Large–scale ecological restoration programs are considered as one of the key strategies to enhance ecosystem services. The Headstream region of Yangtze River (HYZR), which is claimed to be China’s Water Tower but witnessed the rapid grassland deterioration during 1970s–2000, has seen a series of grassland restoration programs since 2000. But few studies have thoroughly estimated the hydrological effect of this recent grassland restoration. Here we show that restoration significantly reduces growing-season water yield coefficient (WYC) from 0.37 ± 0.07 during 1982–1999 to 0.24 ± 0.07 during 2000–2012. Increased evapotranspiration (ET) is identified as the main driver for the observed decline in WYC. After factoring out climate change effects, vegetation restoration reduces streamflow by 9.75 ± 0.48 mm from the period 1982–1999 to the period 2000–2012, amounting to 16.4 ± 0. 80% of climatological growing-season streamflow. In contrary to water yield, restoration is conducive to soil water retention – an argument that is supported by long-term in-situ grazing exclusion experiment. Grassland restoration therefore improves local soil water conditions but undercuts gain in downstream water resources associated with precipitation increases.