The combined effects of overgrazing and climate warming drive shrubs to encroach into grassland ecosystems worldwide, while removal of the shrub is an important controlling measure for shrub encroachment. It is meaningful for sustainable grassland management to identify the impacts of transitions between grass and shrub vegetation on the ecosystem, eco-hydrology, soil erosion, and soil erosional carbon loss. In this paper, we reviewed the effects of shrub encroachment and its removal on the plant community and soil function (e.g., soil organic carbon), and the impact mechanism of these transitions between grass and shrub vegetation on the water-carbon coupling processes such as the ecohydrological, soil erosional, and erosional carbon loss processes. According to the weakness of previous research on the impacts of shrub encroachment and its removal control on plant community, vegetation pattern, and soil-water processes and functions, we provided several suggestions for future research directions:further studying the influence mechanism of transitions between grass and shrub vegetation on biogeochemical cycles such as carbon and nitrogen cycle, paying more attention to applying new techniques such as nuclear magnetic resonance (NMR) spectroscopy, biomarker, isotopes, and methods (e.g., indicators and connectivity of vegetation pattern) to determine the ecological effects of water and carbon for transitions between grass and shrub vegetation, and strengthening the multi-factor, multi-process and multi-scale comprehensive study among grass-shrub vegetation pattern and water-carbon processes such as eco-hydrology, soil erosion and soil erosional carbon loss. These can provide theoretical support for scientific and practical ecological restoration and multi-objective land-use management of shrub-encroached grassland.