Biodiversity is considered to mitigate the adverse effects of changing precipitation patterns. However, our understanding of how tree diversity at the local neighbourhood scale modulates the water use and leaf physiology of individual trees remains unclear. We made use of a large-scale tree diversity experiment in subtropical China to study eight tree species along an experimentally manipulated gradient of local neighbourhood tree species richness. Twig wood carbon isotope composition (δ13Cwood) was used as an indicator for immediate leaf-level responses to water availability in relation to local neighbourhood conditions and a target tree's functional traits. Across species, a target tree's δ13Cwood signatures decreased progressively with increasing neighbourhood species richness, with effects being strongest at high neighbourhood shading intensity. Moreover, the δ13Cwood-shading relationship shifted from positive (thin-leaved species) or neutral (thick-leaved species) in conspecific to negative in heterospecific neighbourhoods, most likely owing to a lower interspecific competition for water and microclimate amelioration. This suggests that promoting tree species richness at the local neighbourhood scale may improve a tree's local water supply with potential effects for an optimized water-use efficiency of tree communities during drought. This assumption, however, requires validation by further studies that focus on mechanisms that regulate the water availability in mixtures.