Small hydropower is a kind of clean and non-carbonate energy, which is rich in resources and environmentally friendly. Not only is the small hydropower an important part of China's strategy of sustainable development, but also it is the basic national policy of long-term adherence. This article attempted to expound China's small hydropower investment system and establish the right to compensation for the use of small hydropower transfer market allocation mechanism through the development of Chinese small hydropower Analysis. In this paper,the establishment of many ways of electricity tariff about small hydropower, the financing policy and water resources were discussed. Furthermore, compensation mechanisms for the use right transfer and the external compensation mechanism of hydropower development projects were reviewed. The obtained result was the following:Not only is reform of rural small hydropower in China the need of small hydropower development, but also it is essential guarantee of new countryside construction and sustainable development.