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Shrubs are important plant species in grassland ecosystems worldwide, and their density and cover have been gradually increasing globally. However, the interaction effect of grazing and aridity on population recruitment and population growth of shrub species in grasslands has not been examined explicitly. We examined sapling establishment, sexual recruitment, population mortality, and population growth of Caragana stenophylla along a climatic aridity gradient and a grazing intensity gradient in the Inner Mongolia Steppe, using manipulative field experiments. Sapling establishment, sapling height, and sexual recruitment of C. stenophylla decreased as climatic aridity and grazing intensity increased. The negative effects of grazing on sapling establishment and sexual recruitment gradually increased as climatic aridity increased. The effect of climatic aridity and grazing on population mortality was influenced by sexual recruitment. In the combined treatments of climatic aridity and grazing, population mortality was relatively high when sexual recruitment was relatively high, while population mortality increased as climatic aridity and grazing increased when sexual recruitment was relatively low. C. stenophylla population increased under relatively low drought stress and mild grazing but declined under strong drought stress and/or severe grazing. Our results suggested that to maintain viable Caragana populations, appropriate grazing policies must be made according to climate aridity gradient.