To address the issues of high surface polarity, poor compatibility with polyvinyl chloride (PVC), and low flame retardancy efficiency in magnesium hydroxide (MH), in the study, carboxymethyl cellulose (CMC) was employed to modify MH through microencapsulation. CMC formed hydrogen bonds with MH to produce a microencapsulated flame retardant (CMC-MH), which is then incorporated into polyvinyl chloride (PVC) to prepare composite materials. Thermogravimetric analysis, scanning electron microscopy, smoke density tests, and tensile tests were employed to characterize the thermal stability, flame retardancy, smoke suppression performance, and mechanical properties of the composite materials. The results show that the char residue rate of CMC-MH/PVC samples at 800 °C is approximately 13.2%, higher than that of PVC (1.4%) and MH/PVC (12%). The LOI value of CMC-MH/PVC is 28.6%, an increase of 3.3% compared to the LOI of MH/PVC (25.3%). The maximum specific optical density value of CMC-MH/PVC is 14.9%, lower than that of PVC (37.5%) and MH/PVC (20.9%). The tensile strength and elongation at break of CMC-MH/PVC are higher than those of MH/PVC and slightly lower than those of PVC, and their mechanical properties will not have a negative impact on the composites. These results indicate that the CMC-MH flame retardant is well dispersed, forming a dense char residue, thereby enhancing the flame retardant and smoke suppression performance of PVC composite materials.