China has seen a steady rise in the number of migrant children in recent years. Aside from focusing on educational barriers, the migrant-related public issue has shifted its attention to mental health. Previous discoveries on the state of migrant children's mental health in China has revealed a perceivable deviant trend along with multiple contributing causes. However, there are few studies concentrated on elaborating a consecutive course of migrant children's mental development under a dedicated psychological framework. Therefore, this study unfolded the progressing mental health status of migrant children within the framework of social identity theory. By expounding the flow of social categorization, social identification, and social comparison, this study enunciates that migrant children are categorized as social-outcasts and frustrated-adaptors under the influence of institutions and culture. Then they are tended to be subject to marginalized identification by community social capital. At the same time, there are promising mediating factors contributed by family and school, which render them identification of sense of belonging. It is followed by an inevitable phase of social comparison, during which upward comparison strengthens the positive effect of social support and spontaneous inclusion. This study also provided implications on the aspect of government, family, and school level to exert joint efforts to accelerate migrant children's adaptability into urban contexts with a well-off mental status.