A year away from the start of a major scheme to divert water from the water-abundant south of China to the arid north, a central Chinese city that is home to a major water source still faces huge challenges in pollution control.

A 370-square-kilometer area in Danjiangkou in the city of Shiyan, Hubei Province, is scheduled to be inundated as of August to store water from the Hanjiang River, a major tributary of the Yangtze River, the country's largest.

The Danjiangkou reservoir, the water source of China's mega south-to-north water diversion project, is expected to supply water through canals and pipelines to the parched northern regions, including Beijing and Tianjin, starting mid-2014.

The inland poverty-stricken city, however, faces funding shortages in fighting pollution in five rivers that flow into the Danjiangkou reservoir as half of the local sewage water is discharged untreated.

The water quality in one of the five rivers is labeled "Grade IV," which means "industrial use only," and the water in the other four is rated at the lower "Grade V," meaning "agricultural use only."

The water in all the five rivers needs to meet "Grade III" by 2015, according to a water pollution control plan that was issued by the State Council, China's cabinet.

"The target is very unlikely to be met as many pollution control projects lag behind schedule due to a funding shortages," said Cheng Jiagang, the vice mayor of Shiyan.

The local government faces a funding gap of 3 billion yuan ($486 million) in building sewage pipes and ecological restoration facilities, and expanding sewage treatment capacity to clean up the rivers and meet the target, the official explained.

Due to the lack of a proper sewage system, there are 1.3 million tons of waste water directly discharged into the five rivers per day, Cheng said, adding that the city needs to build another 1,106 kilometers of sewage pipelines to collect all the waste water.

In a bid to ensure clean water, Shiyan has shut down 329 factories in recent years, which resulted in a decline in fiscal revenues by 800 million yuan per year.