Shrub encroachment is the main environment problem at the steppe region on the earth. This study observed rainfall redistribution composition of plant canopy, surface runoff, and soil moisture content at the shrub and interspace grass patches respectively, analyzed effects of shrub encroachment on water redistribution and utilization in the typical steppe which encroached by Caragana microphalla Lam. (C. microphalla) in Inner Mongolia. Results showed that the average canopy interception was 20.86% and 7.88% for shrub and interspace grass patches respectively, and the average surface runoff coefficient was 5.95% and 17.19% at shrub and interspace grass patches respectively. Shrub patches had greater water capability than intersapce grass patches in the same rainfall event, so soil moisture content under the canopy of shrub patches was much greater than intersapce grass patches after rainfall events in the 0-60 cm soil layers; soil evapotranspiration below the canopy of shrub patches was much greater than grass patches in the 0-60 cm soil layers, the evapotranspiration rate below the canopy of shrub patches was much lower than interspace grass patches in the 0-10 cm soil layers, but it was much greater than intersapce grass patches in the 10-60 cm soil layers. This study suggested that that shrub encroachment increased spatial heterogeneity of water distribution in grassland ecosystem at the arid and semiarid region where water was one of the key restriction factor, shrub patches could capture and utilize more water to produce more biomass than interspace grass patches.