This study investigated spatial pattern, plant biomass and community characteristics of the shrub and interspace grass patches in Caragana microphylla Lam.(C. microphylla) encroached grassland of Inner Mongolia. Field quadrat surveys were conducted at three sites with lightly, moderately and seriously degradation states mainly resulting from overgrazing. Results indicated that the aboveground biomass of grass patches decreased with the increasing intensity of degradation, but C. microphylla showed reversed trend. The total aboveground biomass including grasses and C. microphylla decreased from the lightly to the moderately degradation sites and then increased from the moderately to the seriously degradation sites. Biodiversity increased at shrub patches with increasing degradation intensity from the lightly to the seriously degradation sites, but decreased from the lightly to the moderately degradation sites and then reversed from the moderately to the seriously degradation sites at the interspace grass patches. We noted that biodiversity of shrub patches was much less than that of the interspace grass patches at the lightly degradation site, while it was greater than the interspace grass patches at the moderately and seriously degradation sites. The above results suggest that two stable states might exist in the process of shrub encroachment, i.e., grasses dominated and C. microphylla dominated. Ecosystem was stable with more biodiversity and biomass when grasses or C. microphylla dominated, but it was unstable with less biodiversity and biomass at the transitional stage from grasses to shrubs.