<p>The mental health of young people serves as a social barometer, reflecting societal conditions. However, the relationship between social inequality and youth mental health remains a contested issue. This study uses data from the China General Social Survey (CGSS) 2021 and 2023, focusing on Chinese youth aged 18–30, to analyze the association between social inequality and their mental health, along with its group heterogeneity. This study reveals an overall inverted U-shaped pattern between social inequality and mental health of this demographic. Regarding group heterogeneity, an inverted U-shaped pattern is found among males and those with non-agricultural hukou; a positive association is found among youth within the system; and no significant association is found among females, youth with agricultural hukou and youth outside the system. The findings indicate that youth mental health is the outcome of the interplay between the “tunnel effect” and the “relative deprivation effect” and identify a potential a “system justification” effect among youth outside the system.</p>