The perennial grass Stipa baicalensis is the zonic species in the steppe of China, but is currently being replaced by the azonic species of Leymus chinensis. In this area, aridification is on the increase; therefore, we hypothesize that water competition plays a significant role in this succession. The limit of osmotic adjustment in S. baicalensis (13.94%-16.30% PEG) was much lower than that in L. chinensis (17.20%-24.50% PEG) in response to drought. The synoptic causal model accounted for most of the variation in the process of physiological regulation as indicated by the small residual effect (0.121-0.161). These results demonstrated that the two species dealt with drought in different ways. Stomata of L. chinensis acted more directly on transpiration, and the advantage in water competition resulted from the powerful stomatal control. On the other hand, S. baicalensis was more easily affected by non-stomatal limitation which was physiologically inactive in response to drought. Results supported the hypothesis above. S. baicalensis was more susceptible to the damage of aridification and was less competitive to water than L. chinensis.