This study provides a systematic method to study the gas/water transport behavior and water retention behavior in gas shale reservoir using analytical and numerical modelling approaches. The critical water saturation determined from the relative permeability curve is regarded as the turning point between two gas production stages: Stage I and Stage II. At Stage I, the gas /water two phase flow dominates shale gas production period, while at Stage II the single gas flow and the flow of water in adsorbed phase are dominative. The improved permeability evolution model incorporates both the gas and water sorption-induced swelling strains. The permeability ratio is a time- and location-dependent parameter and its change can be divided into three stage, namely, the increase at early time, the decrease at mid-term time, and the increase at later production time. With gas depletion, gas pressure drawdown significantly dominates the evolution of permeability ratio. Continuously, the effect of sorption induced matrix shrinkage strain will become dominative with gas pressure decreases to low values. Due to the gas source supplement induced by gas desorption at Stage I, the gas production rate will temporarily increase but then will continuously decrease till to the lowest level at critical water saturation. At Stage II, the gas production rate is significantly influenced by residual water content in shale controlled by the flow of water in adsorbed phase. In addition, the effects of elastic properties (i.e. Young's modulus and Poisson's ratio), initial permeability and diffusion time on permeability ratio and gas/water production profiles were discussed. These results provide a first rational method for analyzing the gas/water transport behavior and water retention behavior with potential application of shale gas recovery.