This paper describes the community mental health services in Shanghai, analyses the effectiveness of these services, and discusses their culture-specific characteristics. It reports on a prospective, matched-control study of the three most important types of service: a community follow-up programme in psychiatric out-patient clinics at primary-level general hospitals, ‘guardianship networks’ operated by non-professional volunteers, and work therapy stations. In total 308 pairs of subjects completed the study. Using Chinese versions of the Disability Assessment Schedule to assess impairment in psychosocial functioning and the Present State Examination to assess the levels of positive and negative symptoms, ten blind evaluators who had excellent inter-rater reliability assessed the functioning of subjects at enrolment and every six months for the next two years. Over the two years, symptoms and social functioning improved in the treatment groups and deteriorated in the control groups. Thus these community psychiatric services have the dual benefit of promoting rehabilitation and preventing psychosocial deterioration.