This paper describes the development of community mental health services in Nanjing and reports on a retrospective study that compared the two-year outcome for 78 schizophrenic patients who attended four enterprise-based sheltered workshops (experimental group) with that of 78 schizophrenic patients who attended an out-patient clinic (control group). Despite having a longer course of illness and more prior hospital admissions than patients in the control group, at the end of the two years patients treated in enterprise-based sheltered workshops had significantly less psychosocial dysfunction (mean Social Dysfunction Screening Schedule score 3.4 (s.d. 0.2) v. 7.4 (s.d. 0.7), t = 49.2, d.f. 154, P < 0.001) and less severe psychiatric symptomatology (mean Brief Psychiatric Rating Scale score 33.1 (s.d. 2.7) v. 54.1 (s.d. 2.9), t = 47.0, d.f. 154, P < 0.001). Moreover, compared with the control group, over the two year period a smaller proportion of the experimental group experienced a clinical relapse (14.1% v. 38.5%, chi 2 = 5.10, d.f. 1, P < 0.05) or hospital readmission (7.7% v. 21.8%, chi 2 = 10.7, d.f. 1, P < 0.01). We conclude that the organisation of on-site sheltered workshops for mentally ill factory workers is an effective model for promoting community mental health that merits widespread application in China.