Widespread shrub encroachment is profoundly impacting the structures and functions of global drylands, and precipitation change is assumed to be one of the most critical factors affecting this phenomenon. However, there is little evidence to show how precipitation changes will affect the process. In this study, we conducted a 6-year precipitation manipulation experiment (-30%, ambient, +30%, and +50%) to investigate the effects of precipitation changes on the growth of shrubs and herbaceous plants in a shrub-encroached grassland in Inner Mongolia. We found that the increasing precipitation significantly increased the mean height, coverage, and aboveground biomass of herbaceous species, while the growth of shrub species did not exhibit a significant response to precipitation changes. With increasing precipitation, the relative coverage of shrubs decreased, while that of herbs increased. The native dominant herbaceous plant (Leymus chinensis) with more sensitive maximum photosynthetic rate to the precipitation change, showed higher photosynthetic nitrogen use efficiency and water use efficiency than those of the encroached shrub species (Caragana microphylla) at high soil moisture contents, reflecting that the ecophysiological characteristics of L. chinensis might provide it a competitive advantage under increased precipitation. Our findings suggest that increasing precipitation may slow down shrub encroachment by facilitating herbaceous growth in Mongolian grasslands, and consequently affect the forage value and carbon budget in these ecosystems.