Visitors to Wang Baoying's new house must tread softly or they will frighten her son. The four-year-old boy is not afraid of strangers. He is terrified his home will fall down.

This is not just the fear of a childish imagination. Wang's concrete home – built this year to resettle migrants from China's latest and greatest hydro-engineering project – wobbles when she walks. Her neighbour's floor has completely collapsed. Another's bedroom is tilting. There are cracks on many of the walls.

"My son cries every night because he thinks the house might collapse," says Wang, who discovered the problems three days after she moved in to Shuitianyang new village. "It's terrible. The authorities told us this would be a perfect home."

The former farmer is one of 345,000 people who are being relocated in a desperate bid to ease Beijing's drought crisis with a transfusion of water from the Yangtze basin, 1,277km to the south. Her old home and farmland will soon be flooded by the central leg of three vast channels that make up the £40bn South-North water diversion, a 50-year project to replenish the arid north of China. According to US diplomatic cables released via WikiLeaks last week, the project is plagued by pollution and misconceived.

Though Wang cried when she left her home in Xichuan, village leaders and propaganda slogans assured her the sacrifice was necessary for the nation. Migrants have also been promised new homes, compensation and farmland. But the reality, as many are discovering, is shoddily constructed housing, money that has been skimmed by officials, no jobs and a cold welcome from existing locals who are reluctant to share their property.

For the middle leg of the project, the origin of the diversion is Danjiangkou, where bathers plunge into the Han River beneath a vast dam and a giant slogan on the concrete embankment: "People and Water in Harmony, North and South Both Benefit."

Paramilitary police guard the entrance to the reservoir on the other side of the barrier, which will not reach its maximum height until 2014. When the diversion channels are completed, water will flow north to Beijing and buildings along the banks will be submerged.

The resettlement from those areas is due to finish by October. As much as any nation can be, China is accustomed to such migrations. Countless millions of farmers have been moved to make way for city expansion and the construction of airports, factories and roads.

Hydro-engineering projects account for a major share of this human torrent. Between 1949 and 1999, 17.5 million people – twice the population of London - were relocated for dams. Since then, the pace has accelerated thanks to mega-projects like the Three Gorges dam, which has forced the relocation of 1.5 million people, and the South-North diversion.

Many families have been resettled more than once. Zhang Guangren, an elderly woman who farms a small plot on the edge of Danjiangkou reservoir, was forced to move twice by dam projects during her youth. Now her son has been told he must leave his nearby apartment which will be flooded when water levels are raised for the diversion. She says the compensation – 40,000 yuan – is not enough to buy a new home, but they have no choice.

"You can't go against the government. If you do, they'll force you to move."

The government is building 85 schools, 71 clinics and 3.2m square metres of new housing. Compensation is higher than before. There is a little more consultation. But it is also being pushed through more quickly. It has taken 18 years to move everyone from the Three Gorges area. The diversion resettlement is taking place over just two years. Compared to past relocations, the state media insists the relocation is moving smoothly.

But when the Guardian talked to 30 relocated people in three villages in Nanyang, Henan province, only one was glad to have moved. Eight reluctantly accepted the patriotic sacrifice they had to make for the "national project." The remaining 21 were furious.

Without exception, the longer they has been at their new homes the less they liked them.

The adjustment is already proving difficult for some. Zhang Jianchao was furious that local hospitals would not deliver the baby of his daughter-in-law. In a panic at her labour pains, he hired a car and drove his son and wife 160km back to their old town for the birth.

"I'm angry. It was very worrying and expensive," said the former silkworm farmer, who is now without land or work and living with his large family on a government allowance of 100 yuan (£10) per person per month. He says their new home is half the size of his old place because local officials cheated him of fair compensation.

The most commonly heard complaint is of official corruption. Villager after villager said their compensation was skimmed by cadres, usually by undervaluing the farmers' plots of land and over-estimating their own holdings.

"I can accept that it will take time for us to make a living in our new homes but it is not fair that the officials have profited from this move. We were told that the sacrifice for this project would be shared," said Chen Xinfeng [name changed], who runs a small restaurant. "President Hu Jintao said honest folk shouldn't lose out, but that is what has happened."

Propaganda slogans on walls and banners strung across the road urge residents to play a patriotic role to the "key state-level project". Many urge existing communities in the area to welcome the newcomers. "The waters of Danjiangkou are fresh and sweet. My heart is linked to the new migrant's heart," proclaims one of the most poetic exhortations.

But friction between the old and new communities seems to be getting worse. At Liangzhuandong new village – which migrants moved into a year ago - a crowd of residents gathered to expressed a long list of grievances, including inadequate compensation, unfulfilled promises of new land, poor water quality and fights with locals.

The migrants are unhappy they have not been given a share of the local farmland as they were promised. The old residents complain their new neighbours are "uneducated people from the mountains."

Both accuse the other of theft. This summer, the tension erupted into violence. According to several accounts, a fight between two individuals escalated rapidly into a melee involving several hundred people.

Elsewhere, there have been reports of demonstrations. Last November, police clashed with thousands of migrants in Qianjiang city to protest shoddy housing and inadequate compensation, according to Radio Free Asia.

Liu Guixian, director of Nanyang Relocation Office, said these cases were exceptions.

"Some new migrants get along with locals well. Some don't. It will take time to mix cultures and habits." He insisted the damaged homes would be repaired and the villagers would receive land and compensation by November. Adjustments, he said, take time.

Whether all these teething pains are even worthwhile remains to be seen, according to the US government analysis released by WikiLeaks. In a cable dated 8 August 2008, the US embassy said the diversion is poorly conceived and unlikely to be completed.

The eastern and central routes might ultimately serve their intended purpose, it says, but the western route could lead to "an irreversible drain on government funds."

The US diplomats said the money would be much better spent on water conservation and improved irrigation. Ultimately, they predicted, the supply-side engineered solution would fail.

"In the unlikely event that the project is completed in its entirety by its original deadline of 2050, the water crisis may have intensified to such a point that the amount of water the project is able to supply will have already become insufficient, making it necessary to find an entirely new solution," they noted.

Other doubts remain. Du Yun, a geographer at the Chinese Academy of Sciences in Wuhan, has questioned whether the Han River can spare water. Ultimately, he said, the project's viability could be undermined by changing weather patterns and improved technology.

"The trend recently is for more rain in the north and less in the south. Water diversion is not cheap, but the price of desalination is falling. Right now, it is unclear whether water diversion is economical".

A final judgment on the cost and consequences of the project will not be clear for many years for both the nation and the individuals whose lives have changed.

Jia Zhaixu was one of the newest, happiest arrivals, having moved three days earlier and was settling in to a neat whitewashed, two-storey buildings in Dashiqiao. But the former farmer was clear-eyed about the future.

"A new home is like a new wife. For the first three days, it's very exciting, but after that who knows how you will feel," he said.

• Additional reporting by Cecily Huang

Major Chinese hydroprojects and resettled population

Three Gorges dam – 1.5m people

Sanmenxia dam – 410,000 people

Danjiangkou dam – 380,000

South-North water diversion – 345,000

Xiaolangdi dam – 200,000 people

Pubugou dam – 120,000

Zipingpu dam – 33,000 people