Objective: This cross-sectional study examined the levels of self-stigma, hope, and family functioning among Chinese people with mental illness (MI). We also investigated the mediating role of family functioning in the relationship between self-stigma and hope. Method: Three-hundred thirty participants with MI (Mage = 42.73, SD = 14.11, 52.09% female, 61.74% schizophrenia) were surveyed. Hayes' PROCESS macro analysis (Model 4) was performed to verify the mediating effect. Results: The analysis revealed that 43.1% of the respondents had a high level of self-stigma, 68.5% indicated a low/moderate level of hope, and 54% had moderate/severe impairment in family functioning. This supports the partial mediating effect of family functioning on the relationship between self-stigma and hope. Conclusions: The self-stigmatizing experiences of Chinese people with MI adversely impair normal family functioning and reduce hope, limiting recovery prospects. Relevant results highlight the influence of the family environment on the psychological mechanisms of PMI. Limitations and future research directions are addressed.