<p>Virtual water trade, driven by grain flows, offers an effective strategy for conserving scarce water resources, especially in water-stressed regions. This study investigates the economic effects of inter-provincial virtual water trade in grain across 31 Chinese provinces. A gravity model is applied to estimate the direction and magnitude of virtual water flows, while spatial econometric models are used to assess their impact on rural household income. The results reveal that virtual water inflows are associated with an increase in non-farm income but a decline in income from farming activities. However, since non-farm income offers higher marginal returns, the overall income of farmers still increases. Moreover, the economic effects of virtual water flows differ significantly between exporting and importing provinces, and exhibit heterogeneity across income groups. In addition, the level of agricultural development moderates these impacts. Regions with more advanced agricultural sectors tend to experience stronger negative effects on farming income and weaker positive effects on non-farm income. These findings contribute to understanding the economic consequences of grain-based virtual water trade and offer new perspectives for improving water resource management and food security strategies. The study provides policy-relevant insights for developing countries seeking to balance agricultural development with sustainable water use.</p>