In an attempt to alleviate the problem of grassland degradation on the Qinghai‐Tibet Plateau in China, state and local authorities in 2003, initiated the “Retire Livestock and Restore Pastures” ecological engineering program, requiring the use of enclosure fencing to enable grazing exclusion and rotational grazing. A five‐year controlled grazing experiment was conducted to determine the effects of this program on (1) sheep live weight gain; and (2a) standing herbage biomass; and (2b) species diversity. Effects of temporal within‐year variation in precipitation and temperature on livestock productivity, standing herbage biomass, and species diversity were also investigated. At the end of 5 yr, grazing exclusion showed no significant difference in standing herbage biomass or in species diversity, compared with either continuous grazing or rotational grazing. Rotational grazing at the high stocking rate significantly promoted sheep live weight gain per hectare, but not per sheep; neither standing herbage biomass, nor species diversity, whether under continuous (i.e., traditional) or rotational grazing, showed a significant difference. Under rotational grazing, higher standing herbage biomass and species diversity were required to maintain or increase sheep liveweight, compared with continuous grazing. Temporal distribution of precipitation and temperature had more influence on alpine grassland parameters, than did grazing. Results of this study suggest that herders’ local traditional knowledge and expertise might be useful in modifying Government guidelines to fine tune grazing management with the dynamics of the alpine meadow ecosystem, and that it is important to consider equilibrium and non‐equilibrium theory in formulating a policy which benefits both herders and grassland. Traditional continuous grazing at a carefully chosen light stocking rate appears to be the most appropriate way to manage livestock and grassland in this region.