Water resource is a constraining factor in the sustainable development of semi-arid areas (SAAs). In order to study the constraining effects of scarce water resources on the sustainable development of SAAs more accurately, this paper selects the typical representative of SAAs, Tongliao City, as the case study area, and water resource System Dynamics (SD) model was established for the City that described the constraints and the resultant restrictions on sustainable development. The operation of the SD model showed that under the traditional development path, Tongliao City maintained rapid economic growth even though restriction of its water resources had a significant constraining effect. The simulation showed that in 2018, the first water shortage occurred in Tongliao City and the situation of water shortage was getting worse. By 2030 the water shortage will reach 28.9%. Industrial production and urban living will utilize all of the available ecological water and, in consequence, the natural environment will seriously deteriorate. Analysis of the simulation results has shown that, under the existing development path, the structure of water consumption in Tongliao City is irrational. Continuation of the established development model will result in a drastic shortage of water resources, and will curtail significantly the sustainable development of the city. The results of the present study have demonstrated conclusively that shortage of water resources has become the key factor that will restrict the sustainable development of SAAs. Thus, in the future, development methods should be changed to improve the utilization efficiency of water resources in order to achieve sustainable development in SAAs.