A record of around 100,000 people were expected to take part in the event in Jinghong, a few hours drive from China's border with Myanmar.
Official celebrations began at noon, when the city's designated water splashing square erupted into chaos as thousands scooped torrents high into the air and at each other.
"The splashing gets more crazy every year," said 67-year old retired government official Ai Hannun, a member of China's Dai minority, who hold the festival to usher in a new year set by their own traditional calendar.
Orange-robed Buddhist monks led a prayer to launch the festival, which has its roots in the religious practice of bathing a statue of the Buddha, and is also celebrated in other south east Asian countries including Thailand.
"Water-splashing used to be carried out at home, with family and friends, as a way of showing respect," he said.
For most participants, including thousands of tourists from across China, the festival's religious origins were less important than the thrills of soaking, and being soaked.
"There are no limits to who you can splash, except that you need to be careful around children," said Zhou Shan, who used a double-tanked blue water gun and wore a green bucket on his head for protection.
Others stood on the back of pick-up trucks to carry out drive-by splashings.
Loudspeaker announcements reminded participants to "create a civilised splashing environment".
The Dai, who are estimated to number 1.3 million, are one of more than 50 offical ethnic minorities in China and speak a language closer to Thai than the Mandarin Chinese spoken by the country's leaders.
After opening the festival, the region's top Dai official Luo Hongjiang received a thorough drenching.
The local government hoped to encourage revellers to save water by limiting the water throwing to two hours, he said, although many revellers continued beyond the 2pm cut-off point.
"We've limited the official time for splashing out of consideration for the feelings of drought-hit areas. But we can't force anyone to stop throwing water. It's more like a suggestion," he said.
A four-year drought has affected 600,000 people in the surrounding province of Yunnan, where several cities have imposed usage limits.
Jinghong, which is fed by the Mekong, was not experiencing a serious drought, said Luo.