Abstract: Encroachment by woody plants in the Xilin River Basin of Inner Mongolia is seen with the distribution of Caragana microphylla. To understand the effects of grazing on the expanded distribution of woody plants, we studied how grazing influences the number of seeds produced by C. microphylla (the direct effect of grazing) and how frugivorous insects influence the reproduction success of C. microphylla with different grazing treatments (the indirect effect of grazing). We surveyed the number of pods and seeds and seed predation after dispersal under sites with further free grazing or enclosed from grazing. Grazing affected seed production directly and indirectly; the indirect effect of grazing can largely offset the direct effect. The risk of C. microphylla expansion increases in the first few years after grazing stops, which should be a focus in grassland ecosystem management.