The welfare of laying hens in cage systems is of increasing concern. Represented by the European Union’s ‘End the Cage Age’ initiative, more and more countries have advocated cage-free farming. China, an important country for poultry farming and consumption in the world, is highly dependent on cage systems and lacks confidence in alternative (e.g., free-range) systems. In this context, using China’s abundant woodland resources (including natural forests, plantations, and commercial forests) to facilitate the management of laying hens in a free-range environment may provide highly promising welfare improvement programs. On the basis of the Five Freedoms, we assess the welfare status of understory laying hen management systems with reference to the behavioural needs and preferences of laying hens and the EU standards for free-range and organic production (highest animal welfare standards in the world). The results show that the considered systems meet or even exceed these standards, in terms of key indicators such as outdoor and indoor stocking density, outdoor activity time, and food and drug use. Specifically, the systems provide sufficient organic food for laying hens without using antibiotics. They allow laying hens to avoid beak trimming, as well as to express nesting, foraging, perching, reproductive, dustbathing and other priority behaviours. The presence of roosters and higher use of woodland space allow the laying hens to achieve better feather and bone conditions, thus reducing stress and fear damage. Notably, the predation problem is not yet considered significant. Second, there is evidence that understory laying hen systems are profitable and have been welcomed and supported by farmers and governments in the southwest, south, and north of China. However, whether it can be scaled up is uncertain, and further research is needed. In addition, laying hens in this management system face various risks, such as foot injury, parasitism, and high dependence on consumer markets, which must be considered. Overall, agro-forestry, or accurately, understory poultry raising, provides opportunities and possibilities for free-range laying hens and welfare improvement in China and other countries.