The mountain road that winds above the steep ravines of Shennongjia ought to offer one of the most attractive views in China. From dense, pristine forests to criss-crossing rivers, it passes near an area of ecological wealth that is recognised both by the United Nations as a World Biosphere Reserve, and by popular culture as the impenetrable home of the mythical "Shennongjia wild man."

But in recent weeks, this stunning region has drawn the nation's attention to the uglier side of economic development as details emerge of a rapid and poorly regulated expansion by small, hydroelectric power plants that have choked local rivers with dams, pierced mountain slopes with pipes and left locals fuming about the loss of their livelihoods.

The debate - which has spread to issues of governance, censorship and citizen rights - was sparked by reports last month that revealed four rivers have dried up, dozens of hydropower diversions have been built without environmental impact assessments, and local government officials have been profiting from shares they hold in the companies they are supposed to be regulating.

Shennongjia illustrates what can go wrong. Most than half of the 88 hydropower plants in the region were built before environmental assessments were made obligatory in 2003. Two out of every five built since then were illegally pushed ahead without the necessary checks on the likely impact on people and ecosystems.

Driving from the county town of Songbai, almost everyone the Guardian meets along the roadside is angry at the reckless development of water resources. Although this is one of the poorest areas in Hubei province, locals say they get little benefit. The plants generate small amounts of power, the profits are taken by officials and their environment suffers.

Liu Jianguo (name changed) was a farmer until his land was flooded by the Raojiahe hydroproject three years ago. Now he breaks rocks on river beds that have dried up after their water was diverted.

His wife was jailed for three days for throwing stones at the developers. Her frustration was prompted, he said, by the loss of their livelihood and the government's refusal to listen to their complaints or offer fair compensation.

"What can we do? We are just ordinary people. They are officials," he lamented. "I want people to know about this."

Closer to the plant, Zhou Xiaoqi (name changed) was furious that the Raojiahe dam cut through her farmland and eroded the riverbank below her house. "You can see the cracks on my wall," she says.

The power company, Xingfa, has offered compensation of 110,000 yuan for the third of a hectare she has lost, but she was given no choice and has little opportunity for negotiation or legal redress.

"I have complained again and again, but they fob me off and say, 'Go ahead and sue us. You will never win'," Zhou says. "The government officials have all invested in these projects. Everyone knows that. How else do they force them through so quickly?"

There are parallels with the illegal coal mines that the central government claims to have been cracking down on for decades. Both are privately run with investment kick-backs for local officials who ignore state regulations so the plants can generate profits. Even after the environmental assessment law was passed in 2003, the local government admits that 39% of new projects continued to go ahead without proper approval.

They normally attract little attention. While mega-projects like the Three Gorges Dam or the South-North water diversion affect millions of people, the impact of each small diversion in remote areas is often felt by a less than 1,000 families. But with 85,000 dams in China, the multiple affect is huge and even when small, can cause immense ecological damage, particularly when clustered together, poorly designed and irresponsibly operated.

The latest river to be targeted is the Chengfeng, which is home to giant salamander called "wawayu" or baby fish because of the wailing sounds they make. Locals depend on the pellucid waters for food, irrigation and hygiene.

Two years ago, construction workers began blasting a tunnel in the mountainside and constructing a dam across the river. Once completed, the aim is to divert water from the Chengfeng though the mountain and then down a steep pipe to the valley on the other side, where turbines would milk the electricity. This would generate profits for the power company, but kill off the village by flooding its road and taking most of the water from its river.

"This is the land of peach blossom," said a villager, referring to the classical Chinese story of a mythical paradise. "But if they build the plant here, we will have no water and the fish will die."

Residents are trying to fight back. They have tried legally petitioning the authorities and illegally blocking the traffic in protest. When this failed, they approached a newspaper.

"We are just villagers. We don't know how to argue so we thought we would just invite journalists to come and look for themselves," said one of those behind the plan.

The Chutian Metro Daily newspaper and the Farmer's Daily, based in Wuhan, led the charge with a searing exposé. This was followed by reports on state broadcaster CCTV. The local propaganda department has since clamped down, but the flurry of publicity has attracted the attention of the central government.

Under pressure, Shennongjia announced last month that environmental impact assessments will be carried out on all existing plants, some of which may be closed. "We realise that supervision is not good enough. Some hydropower stations have not operated according to environmental regulations. They have stopped more water than they are supposed to," said Shennongjia propaganda director, Luo Yongbin. "We are still assessing the environmental situation. We aim to have a policy in one month to regulate all the hydropower stations."

Locals said senior leaders from Beijing were expected to visit, pass judgment and punish the local directors of the environment and hydroelectric power departments and other officials alleged to have shares in the firms they should be regulating. Some hope Shennongjia will use its unique status to lead a closure of ill-conceived hydropower plants in return for state compensation to the hydro companies.

"The lack of environmental assessment happens all over China. But the issue has made bigger waves here because Shennongjia is famed for its special ecology and wants to promote tourism," said one of the leading intellectuals in the region, who asked to remain anonymous. "Local people all feel the same. We want our water back. All the rivers here have dried up. The problem is that ordinary people have no say in these projects. There is no benefit for them, but they can't do anything about it."

The central government has acknowledged problems with many small hydroprojects in China and has pledged money for repairs. Late last month, the Communist party newspaper, Global Times, highlighted the scale of the challenge in an article about 40,000 "ill and dangerous" reservoirs.

But the authorities are committed to an expansion of hydropower, which means the best that environmentalists can hope for is probably the closure or postponement of a handful of particularly damaging or illegal projects in the most ecologically sensitive areas.

Environmental values remain second to economic priorities, as was evident outside Shennongjia on a roadside propaganda slogan: "Green is just fashion. Ecology is just a brand."

• Additional reporting by Cecily Huang