Southwestern China (SWC), one of the major rain-fed wheat production zones in China, has become vulnerable to drought in recent years under global climate change. To quantify drought severity during the wheat growing season and its impact on yield loss, we selected the Agricultural Production Systems sIMulator (APSIM) model to simulate wheat growth between 1961 and 2010 in SWC. A new drought index was developed considering different weighting factors of drought for yield loss in three growing phases. The index was shown to be reliable in assessing drought severity in the region. On average, an abnormal drought mainly occurred in mid-west Guizhou with a frequency of 10–30%. Central SWC was subjected to moderate drought with a frequency of 10–30%, whereas severe drought often occurred in Southern Sichuan and the middle of Yunnan with a frequency >50%. Temporally, drought severity fluctuated before 1990, but increased significantly afterwards. Our assessment suggested that irrigation during the period from floral initiation to flowering would help to ameliorate the effects of water stress under climatic variability in the region.