Water environmental carrying capacity (WECC) complex system is characterized by high-step, multi-variables, multi-loops and nonlinear feedback structure. Based on this, the simulation model of WECC in liaohe watershed is built using system dynamics, in order to explore the dynamic variation of WECC in Liaohe watershed of Liaoning Province and its driving factors. The validity test of the model showed that the simulation model constructed could be used to simulate the dynamic variation of WECC and analyze the effect of development policy. From 1996 to 2005, WECC of the region fluctuated significantly, and water environment overloaded with the trend of Deterioration. Water environment is the dependent factor of WECC, but effect of water environmental management on WECC increased gradually. Four schemes of WECC adjustment were designed, and the simulation model constructed was applied to simulate the dynamic variation of WECC in order to select the optimal scheme.