Severe mental illness (SMI) has long been a focus of public health attention. Due to stigma, people with SMI face strong social discrimination and are one of the most vulnerable groups in a society. Building a sound social welfare system is of paramount importance to address their vulnerabilities. China has accumulated a large body of policy practice, but there is still a lack of critical review in this area. Drawing on the framework developed by WHO, this article provides a comprehensive review of China's policy progress in addressing the health care, rehabilitation, life support and social participation needs of people with SMI, as well as the collaborative governance system and detailed policy arrangements. This review raises a number of policy‐related issues for further consideration, such as strengthening community mental health services, improving life support for people with SMI, and reconciling the values of public safety and patients' rights.