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Natural forests in southern China have been severely logged due to high human demand for timber, food, and fuels during the past century, but are recovering in the past decade. The objective of this study was to investigate how vegetation cover changes in composition and structure affected the water budgets of a 9.6-km² Dakeng watershed located in a humid subtropical mountainous region in southern China. We analyzed 27 years (i.e., 1967-1993) of streamflow and climate data and associated vegetation cover change in the watershed. Land use/land cover census and Normalized Difference of Vegetation Index (NDVI) data derived from remote sensing were used to construct historic land cover change patterns. We found that over the period of record, annual streamflow (Q) and runoff/precipitation ratio did not change significantly, nor did the climatic variables, including air temperature, Hamon's potential evapotranspiration (ET), pan evaporation, sunshine hours, and radiation. However, annual ET estimated as the differences between P and Q showed a statistically significant increasing trend. Overall, the NDVI of the watershed had a significant increasing trend in the peak spring growing season. This study concluded that watershed ecosystem ET increased as the vegetation cover shifted from low stock forests to shrub and grasslands that had higher ET rates. A conceptual model was developed for the study watershed to describe the vegetation cover-streamflow relationships during a 50-year time frame. This paper highlighted the importance of eco-physiologically based studies in understanding transitory, nonstationary effects of deforestation or forestation on watershed water balances.