Grassland degradation resulting from global climate change, overgrazing, and rodent damage is expected to influence the magnitude of canopy hydrological fluxes because of reduced vegetation biomass and changed species composition. The objectives of this study were to estimate herbaceous canopy rainfall storage capacity (S) along three different stages of sub-alpine grassland degradation (non-degraded, lightly degraded and moderately degraded) in the Qinghai–Tibetan Plateau, China, and relate changes in S to canopy properties. An artificial wetting method and the water budget balance method, using rain simulations, were used for estimating S. Grassland degradation significantly reduced S. In non-degraded, lightly degraded and moderately degraded grasslands, S estimated using the artificial wetting method were 0.612 ± 0.08 mm, 0.289 ± 0.04 mm, and 0.217 ± 0.01 mm, respectively; S estimated using the water budget balance method were 0.979 ± 0.32 mm, 0.493 ± 0.13 mm, and 0.419 ± 0.09 mm, respectively. These changes could be explained by accompanying changes in above-ground biomass and leaf area index, as well as changes in species composition. Species-specific rainfall storage capacity varied by a factor of 2.7 among the investigated species, with graminoids having the lowest values. Leaf area index was more correlated to S than was canopy coverage. Converting fresh weight of non-leaf tissues into effective leaf area of the corresponding species and then introducing a coefficient of leaf area according to the specific storage capacity of leaves improved the linear relationship between S and leaf area index. Copyright © 2011 John Wiley & Sons, Ltd.