Research of shrub encroachment is becoming an important field in the researches of the global change of terrestrial ecosystem, because grasslands have undergone a period of change in community structure and composition in the arid and semiarid regions on the earth. This study investigated effects of encroachment of Caragana microphylla Lam. on soil and soil hydrological processes in grassland of Inner Mongolia, with field observation and laboratory experiment, wishing to provide theoretical foundation for environment protection and restoration in arid and semiarid regions. Results showed that, soil organic matter, total nitrogen, sand content, silt content, clay content, soil bulk density and the position of upper surface of caliches in soil layers under canopies of shrub patches were 1.54, 1.16, 0.87, 1.34, 1.35, 0.97 and 1.27 times of those under canopies of grass patches, respectively. In addition, topography was one of the important natural factors which formed soil spatial heterogeneity. Soil organic matter, total nitrogen, soil bulk density and the position of caliches in soil layers under canopies of shrub and grass patches all had increasing trend from the top position to the lower position at slope scale. Results of dye tracing experiment showed that wetting front on soil profiles and velocity of soil water infiltration in soil layers under canopies of shrub patches were 1.36 and 5.16 times of those under canopies of grass patches, respectively. Soil water was more sensitive at the upper 0-10 cm soil layers under canopies of grass patches, but it was more sensitive at the soil layers below 25 cm under shrub patches. This study suggested that shrub encroachment strengthened soil heterogeneity, soil water under canopies of shrub patches can be rapidly transported to the deeper soil layers, and soil layers under canopies of shrub could capture more soil nutrients and water. There were positive feedbacks between the development and settlement of C. microphylla and soil morphology in the typical steppe in Inner Mongolia.