Wood decomposition is faster in open habitats than closed-canopy forests, with the mechanisms unclear. When allowing access, termites outcompete fungi during wood decomposition. If increasing canopy density shifts the dominance from termites to fungi, decomposition rates will fall. We conducted wood decomposition experiments in 148 plots of two regenerating forest sites (Site A vs. B) in subtropical China with tree species diversity and composition (for example, specific leaf area) manipulated. Branches of seven species with varying quality were deployed and measured for wood mass-loss rates and decomposer abundance at two time steps (that is, after 1 year and 2 years). We also monitored understory microclimate and predatory ant diversity in 40 plots of Site A. We found that higher canopy density drove the shift of dominance from termites to fungi via facilitating predatory ants and wetter–cooler microclimate. Furthermore, termites promoted decomposition after 1 year especially for the species with highest wood quality, but fungi slowed decomposition after 2 years especially for two species with lower quality. Notably, canopy density negatively correlated with wood mass-loss rates in closed-canopy Site A but not so in more open Site B. Tree diversity and community-weighted mean specific leaf area increased canopy density but did not affect abundance nor decomposition. Our study highlights the importance of canopy density for retarding fine wood decomposition in closed-canopy regenerating forests, probably via shifting the dominance from more (that is, termites) to less efficient decomposer (that is, fungi). Future cross-regional studies are necessary to test the generality of canopy density effect on wood decomposition and the related mechanisms.