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Given that climate change is likely to exacerbate drought in certain parts of the world, a critical issue is how appropriate context-relevant drought policy can be developed and implemented. This paper examines how China is developing policies to help local communities in the Lancang River Basin to cope with the problems of climate variability and change. The research process includes (a) content analysis of relevant policies at different levels of administration and (b) stakeholder interviews to examine how effective policies are at the local level along the Lancang River in Yunnan province. The paper concludes that China needs to provide more emphasis on (a) enhancing the adaptive capacity of institutions and individuals, (b) drought risk rather than disaster management, (c) enhancing coordination between different departments and levels of government, (d) decentralization in policymaking as local governments can make context-relevant comprehensive policies more easily and are less hierarchical in their relationships, (e) involving farmers or other stakeholders in decision making, (f) building up grass root organizations to support policy implementation to compensate for the retreat of governmental organizations from the local level and (g) adopting market mechanisms which are still in a nascent stage now. [ABSTRACT FROM AUTHOR]