Ethnic-racial discrimination against Chinese people have been prevalent, resulting in great stress to Chinese families. The current study was aimed of revealing the intergenerational associations between parental racism-related stress and perceived Sinophobia messages in the media, parental ethnic-racial identity (ERI), parental ethnic-racial socialization (ERS), and children’s psychological difficulties and examined the mediation roles of parental ERI and ERS as well as the effects of contextual factors (i.e., neighborhood racial diversity and perceived Chinese density). This study relies on a longitudinal study funded by National Science Foundation RAPID grant to understand Chinese American children’s and parents’ experience with discrimination and adjustment during COVID-19, and only data collected between March to May, 2020 (Time 1) and January to April, 2021 (Time 2) were used in this study. The subsample consists of 294 Chinese immigrant parents (Mage = 44.28, SD age = 6.18, ages ranged from 29 to 63 years, 79% female). The results showed that parental racism-related stress during COVID-19 at Time 1 had significant indirect effects on parental lower use of avoidance of outgroups at Time 2 and higher maintenance of heritage culture practice at Time 2 via parental ERI greater private regard at Time 2. Parental perceived Sinophobia in the media at Time 1 had significant indirect effects on child’s lower psychological difficulties at Time 2 via parental higher use of maintenance of heritage culture practice at Time 2. Parental racism-related stress during COVID-19 at Time 1 had significant indirect effects on child’s higher psychological difficulties at Time 2 via parental higher use of avoidance of outgroups practice at Time 2. Additionally, the multi-group analysis was used to compare the mediation model differences between neighborhoods with low and high general racial diversity and perceived Chinese ethnic specific density. With regard to neighborhood general racial diversity, only for the high neighborhood general racial diversity group, parental racism-related stress during COVID-19 at Time 1 positively and parental ERI private regard at Time 2 negatively predicted parental use of avoidance of outgroups practices; Parental use of avoidance of outgroups practices positively predicted child’s psychological difficulties at Time 2. For perceived neighborhood Chinese ethnicity specific density, no significant model differences were found between perceived high and low Chinese density groups. Practical implications, limitations, and future directions of these findings were discussed.