Rapid economic development has led to urban sprawl and threatens river systems. In this paper, we used geographic information system (GIS) techniques to examine the effects of urbanisation on the water resources of the Yanggong River watershed in Lijiang City, and analysed the temporal changes in river systems and their impacts on watershed ecosystem functions. The total length of the river systems in the Yanggong River watershed decreased from 786.9 km in 1995 to 674.2 km in 2009 and is predicted to continue to decrease by 35.5 km in the next 11 years according to various data sources. The decrease in river system density started in the Old Town of Lijiang and gradually spread to the surrounding areas. Our analysis shows that urbanisation is failing to take into account the impacts on river systems and their functions, which could cause a reduction in the size of the river systems and degradation of watershed ecosystem functions in the Yanggong River watershed of Lijiang City. It is suggested that protecting the natural river network and making full use of the advantages of the distinctive terrain in the Yanggong River watershed could contribute to the sustainability of urban development in Lijiang City.