Increasing biodiversity has been linked to higher primary productivity in terrestrial ecosystems. However, the underlying ecophysiological mechanisms remain poorly understood. We investigated the effects of surrounding species richness (monoculture, two‐ and four‐species mixtures) on the ecophysiology of Lithocarpus glaber seedlings in experimental plots in subtropical China. A natural rain event isotopically labelled both the water uptaken by the L. glaber seedlings and the carbon in new photoassimilates through changes of photosynthetic discrimination. We followed the labelled carbon (C) and oxygen (O) in the plant–soil–atmosphere continuum. We measured gas‐exchange variables (C assimilation, transpiration and above‐ and belowground respiration) and δ13C in leaf biomass, phloem, soil microbial biomass, leaf‐ and soil‐respired CO
2 as well as δ18O in leaf and xylem water. The 13C signal in phloem and respired CO
2 in L. glaber in monoculture lagged behind those in species mixture, showing a slower transport of new photoassimilates to and through the phloem in monoculture. Furthermore, leaf‐water 18O enrichment above the xylem water in L. glaber increased after the rain in lower diversity plots suggesting a lower ability to compensate for increased transpiration. Lithocarpus glaber in monoculture showed higher C assimilation rate and water‐use efficiency. However, these increased C resources did not translate in higher growth of L. glaber in monoculture suggesting the existence of larger nongrowth‐related C sinks in monoculture. These ecophysiological responses of L. glaber, in agreement with current understanding of phloem transport are consistent with a stronger competition for water resources in monoculture than in species mixtures. Therefore, increasing species diversity in the close vicinity of the studied plants appears to alleviate physiological stress induced by water competition and to counterbalance the negative effects of interspecific competition on assimilation rates for L. glaber by allowing a higher fraction of the C assimilated to be allocated to growth in species mixture than in monoculture.