China’s sustained, rapid economic development and structural transformation since the Reform and Opening-up have brought about social problems such as the increasing cost of raising children, the shortage of high-quality educational resources and the growing pressure on employment. These social issues make Chinese children face an environment of growing up with increasingly fierce competition and multiple pressures of study and life, resulting in a large number of children with psychological problems such as anxiety, fear, neurasthenia, obsessive-compulsive disorder and depression. Furthermore, rural areas have become increased rates of children’s mental health problems, with added factors of left-behind children and rural household poverty caused by the structural imbalances between urban and rural development. It is therefore of great theoretical and practical significance to study the factors affecting children's mental health in rural areas so as to promote healthy growth, educational improvement, human capital accumulation, and social stability. The existing literature mainly focuses on the objective material conditions of rural households, such as real income. They believed that the rural children’s mental health is closely related to household characteristics, and the improvement of household income level plays an important role in promoting children’s mental health. There is however, a research gap that the subjective cognition and evaluation of the income level and economic status of the rural household members, especially the head or the financial supervisor of the household, was ignored. This study is based on the perspective of household income status perception bias and the D-K effect, and we have constructed a representative behavior model of household income status perception bias for theoretical analysis, and we have also adopted the data from Chinese household tracking surveys in 2012, 2014, and 2016 to empirically analyze the mechanism and channel of household income status perception bias on children’s mental health. The research results reveal that: (1) There is a significant negative correlation between household income level and income status perception bias, and poor households are likely to have income status perception bias; (2) The income status perception bias of poor households has a significant positive impact on their gift-giving expenditure and a significant negative impact on the expenditure for children’s education: a greater overestimation of poor household’s income status leads to more gift spending and less expenditure for children's education, which will change the structures of household expenditure; (3) The poor household income status perception bias has a significant negative impact on the mental health status of their children, whereas the household expenditure for children's education has a significant positive impact on children’s mental health status: a greater overestimation of poor household’s income status results in their children’s greater mental pressure. The above results remained robust under different poverty groupings, variable types, clustering hierarchies and regression models. This study provides a new story for children’s mental health-related research, based on the unique economic and cultural background of China, the world’s largest developing country. This study specially spotlights the rural households, especially poor rural households, and enriches the conclusions of existing research from new perspectives such as perception bias and household expenditure structure, thus complementing the latest literature on the accounts and influence mechanisms of children’s mental health. Furthermore, the policy implications based on empirical results are of great significance to improve the mental health of children in poor rural households in developing countries, and contribute to promoting the sustainable development of households and child welfare.