An accurate estimation of water resources dynamics is crucial for proper management of both agriculture and the local ecology, particularly in semi-arid regions. Imperfections in model physics, uncertainties in model land parameters and meteorological data, as well as the human impact on land changes often limit the accuracy of hydrological models in estimating water storages. To mitigate this problem, this study investigated the assimilation of terrestrial water storage variation (TWSV) estimates derived from the Gravity Recovery And Climate Experiment (GRACE) data using an ensemble Kalman filter (EnKF) approach. The region considered was the Hexi Corridor in northern China. The hydrological model used for the analysis was PCR-GLOBWB, driven by satellite-based forcing data from April 2002 to December 2010. The impact of the GRACE data assimilation (DA) scheme was evaluated in terms of the TWSV, as well as the variation of individual hydrological storage estimates. The capability of GRACE DA to adjust the storage level was apparent not only for the entire TWSV but also for the groundwater component. In this study, spatially correlated errors in GRACE data were taken into account, utilizing the full error variance-covariance matrices provided as a part of the GRACE data product. The benefits of this approach were demonstrated by comparing the EnKF results obtained with and without taking into account error correlations. The results were validated against in situ groundwater data from five well sites. On average, the experiments showed that GRACE DA improved the accuracy of groundwater storage estimates by as much as 25 %. The inclusion of error correlations provided an equal or greater improvement in the estimates. In contrast, a validation against in situ streamflow data from two river gauges showed no significant benefits of GRACE DA. This is likely due to the limited spatial and temporal resolution of GRACE observations. Finally, results of the GRACE DA study were used to assess the status of water resources over the Hexi Corridor over the considered 9-year time interval. Areally averaged values revealed that TWS, soil moisture, and groundwater storages over the region decreased with an average rate of approximately 0.2, 0.1, and 0.1 cm yr-1 in terms of equivalent water heights, respectively. A particularly rapid decline in TWS (approximately -0.4 cm yr-1) was seen over the Shiyang River basin located in the southeastern part of Hexi Corridor. The reduction mostly occurred in the groundwater layer. An investigation of the relationship between water resources and agricultural activities suggested that groundwater consumption required to maintain crop yield in the growing season for this specific basin was likely the cause of the groundwater depletion.