The Chinese medicine residue (CMR) is composed of wet woody waste, including licorice and ephedra, so using hydrothermal carbonization (HTC) to recover renewable energy from the CMR is a suitable treatment method. An in-depth analysis of the physicochemical properties and structural evolution mechanism of hydrochars is helpful in fundamentally promoting the energy utilization of traditional Chinese medicine waste residue. Therefore, this study analyzed the physicochemical properties and morphological structure of hydrochar produced under varying HTC conditions using multiple testing methods. The evolution of the hydrochar's structural characteristics can be categorized into three stages: component decomposition, structural rearrangement, and carbonization. During the component decomposition and carbonization stages, numerous nanoscale micropores form within the hydrochar. These micropores' specific surface area and pore volume can reach up to 113.420 m2/g and 0.01913 cm3/g, respectively. The highest fractal dimension values for D1 and D2 are 2.6354 and 2.5565, while the maximum values for the microcrystalline stacking height (Lc) and the average number of crystalline layers (Nave) are 0.3354 and 1.9968, respectively. Consequently, the hydrochar produced during these stages exhibits a rougher pore surface and a more complex structure, making it more suitable for adsorbing heavy metals from soil and sequestering CO2. During the structural rearrangement stage, the hydrochar exhibits higher contents of fixed carbon (FC), MgO, P2O5, and a higher C/N atomic ratio, with maximum values of 38.51%, 0.99%, 1.12%, and 28.49, respectively. Thus, the hydrochar produced during this stage is more suitable for soil remediation and nutrient recovery.