As an essential pathway for nature-based solutions, vegetation restoration can effectively absorb carbon sequestration and mitigate global warming. However, the excessive water consumption by vegetation expansion may create potential water conflicts between natural ecosystems and human systems, and even exacerbate local water shortages, especially in water-limited dryland regions. By evaluating water availability using multiple datasets, this study explored the vegetation restoration potential and the allowable vegetation conversion in China’s drylands under the constraint of water availability. We found that the additional water resources available for vegetation restoration in China’s drylands were 2.7 ± 11 mm (median ± SD) from 2003 to 2018 but it decreased over the period (-1.15 mm yr-1). 45.0% of the drylands area had water deficits, after considering existing vegetation and human water consumption. Under current water constraints, additional gross primary productivity (GPP) that could be restored ranged from 4% to 7% depending on vegetation types (7.1% for forests, 6.1% for grasslands, 4.3% for irrigated crops, and 5.6% for rain-fed crops). In water surplus areas, primarily in the south and east of China’s drylands, most vegetation conversions toward higher-water-consumption types were allowed to occur. In water deficit areas, the west of drylands, even converting all the existing vegetation to less water-intensive types would not compensate for the water deficit in most regions, suggesting local vegetation may have exceeded the water-carrying capacity. Our research highlights the importance of the potential water constraint of vegetation restoration in drylands and provides guidance for decision-making vegetation restoration while ensuring water sustainability.