uses XSI's Hair Module for the river.Isaiah Saxon of Encyclopedia Pictura explains:
"We’re using a hair module Softimage XSI for a CG river. The look we wanted in the river was a rendering of this Japanese-type aesthetic of a river where it is small faceted strands of liquid movement all moving independently in a stringing way. That was the approach we wanted for the river in order to match into the heightened reality with the puppets and costumes and everything else. So we ended up using the hair module in XSI because it was the only thing that could move in that way and it seemed like a reasonable approach without having to hand-animate every string of the river. The hair gets moved by a real water simulation underneath it but it is actually water and hair and then Real Flow foam and splashes and bubbling on top of that."
and more of the making's here.