China began implementing the world’s most ambitious afforestation and forest conservation projects in 2000s. However, whether the forest restoration efforts facilitate forest recovery, and whether the changes in land-use/ land-cover (LULC) driven by afforestation projects affect ecosystem services remains poorly understood. Here, we investigated the changes in LULC and water-related ecosystem services (i.e., water yield, water purification, and soil conservation) using the InVEST (Integrated Valuation of Environmental Service and Tradeoffs) model in China’s Han River basin, the water source region of the South-to-North Water Transfer Project (Middle Route). Our study indicated that forest restoration projects greatly facilitated conversion of shrublands and croplands into forests, which dominated the LULC change (LULCC) and subsequently improved the water purification and soil conservation services but slightly decreased water yield services during 2000–2010. By excluding the influence of climatic factors, we found that 4.79×108 m3 of water yield were reduced by LULCC, which equals to 0.69% of water yield in 2000. In contrast, the LULCC improved soil conservation services markedly and reduced 1.72×107 t sediment, i.e., 12.8% of sediment export in 2000. Meanwhile, 761.7 t nitrogen loading was cut down by the LULCC. The Danjiangkou Reservoir subwatershed, the water supply site for the water transfer project, showed a net decrease of 302 t nitrogen loading from 2000 to 2010. Although the nitrogen loading showed a decreasing trend in 40 out of 50 subwatersheds during 2000–2010, ten subwatersheds showed increasing trends, including the Ren River, Laoguan River, Bai River, Diao River, Youshui River, Tang River, Han River, Xushui River, Sanjia River, and Dan River. These regions should be taken as the priorities for ecosystem restoration and environmental management in the future.