In order to explore the effect of substrate ratio on soil’s water-holding characteristics and soil shrinkage, the soil of Lanzhou New Area (China) was selected as the test soil, while pure soil was used as the control group (CK). Four kinds of mixed substrates T1 (1:1:1), T2 (1:1:2), T3 (4:2:4), T4 (3:3:4) were prepared by mixing mushroom residue, cow dung and vermiculite in different volume ratios. The characteristic curves of the moisture in soil for different substrate ratios were constructed and fitted with Van Genuchten and Brooks-Corey models. The influence of substrate ratios on soil hydraulic parameters was systematically studied, and the soil’s water-holding capacity and shrinkage for various treatments were analyzed. The results showed that, compared with CK, the T1, T2, T3 and T4 treatments significantly improved the soil saturated water content, field water-holding capacity and effective water content in the study area within the suction range of 0-7000 cm. Moreover, the T2 treatment had a significant effect on soil effective water content. The soil’s water-holding capacity of the five treatments was found to lie in the following descending order: T1>T2>T4>T3>CK. Furthermore, VG-M (m, n), VG-M (1-1/n, n), BC-M, VG-B (m, n), VG-B (1-2/n, n) and BC-B could fit the characteristic curves of the moisture in soil for the five treatments. Among them, the VG model could be used as the optimal model to fit the characteristic curves of the moisture in soil for the five treatments at the same time. With the soil dehydration, the soil’s effective linear shrinkage rate increased with the increase of suction, whereas the two had a good logarithmic relationship. Additionally, the addition of substrate was found to be effective. The soil’s shrinkage was inhibited. The study provides a theoretical basis for the improvement of soil’s physical properties and ecological restoration in arid areas.