Albeit poverty reduction has been listed as an overarching objective in many countries’ development plans, little is known about how development could shape poverty dynamics in disadvantaged groups. Guided by a modified capability framework, this study aimed to explore the long-term experiences of poverty dynamics in severe mental illness. Semi-structured interviews were carried out with 20 caregivers who provided care for persons with severe mental illness in Chengdu, China. Their perceptions on development, the illness, and social security were addressed. Content analysis was employed to analyze data. Participants experienced an overall improvement of life quality due to changes on urban infrastructure and transformed lifestyle. However, they were more disadvantaged while facing ability-based opportunities. These families were hindered from transferring opportunities into incomes. Negative impacts of the illness were also reflected in multiple stigma and conversion difficulties. Additionally, the high threshold for payment made those inclusive social security policies not inclusive for them. Poverty associated with severe mental illness was unlikely to be alleviated automatically within the process of development. Social isolation and high caregiving burden had aggravated poverty for those disadvantaged families. Poverty alleviation should be closely linked to the improvement in social policies in China.