OBJECTIVES:  Malnutrition is associated with multiple adverse outcomes among both hospitalized and community-dwelling older adults. Although China has the largest elderly population in the world, limited research assessing the impact malnutrition has on the physical health of Chinese older adults exists. We investigated the association between malnutrition, functional status, health outcomes, and healthcare costs among community-dwelling older Chinese adults. METHODS:  A national sample of adults aged 60 years or older collected as part of the Wave II-2013 China Health and Retirement Longitudinal Study (CHARLS) survey were included in the analysis. Measures of hand grip strength, body mass index, and weight loss were used as indicators of malnutrition status. Functional status was assessed via adapted versions of the Katz Index of independence in basic activities of daily living (ADLs) and the Lawton-Brody Index of independence in instrumental ADLs (IADLs). Health outcomes included self-reported health status and probability of having one of the 14 assessed comorbid conditions (e.g., stroke, chronic stomach disease, hypertension, etc.). Multivariate regressions were used to analyze the associations. RESULTS:  Malnutrition was associated with lower but insignificant basic ADLs (p > 0.1), but significantly lower instrumental ADLs, poorer health status, higher probability of having stroke and chronic stomach disease (all p values < 0.1). As a significant contributor of poorer health status, malnutrition, increased hospital cost by ¥214 (14% increase, p < 0.01) per person per year. Although malnutrition contributed to lower functional independence (IADLs), higher probability of having stroke and chronic stomach disease, no significant increase in hospital costs was observed. CONCLUSIONS:  Malnutrition was associated with poorer functional, health status, and cost outcomes among community-dwelling older Chinese adults. Therefore, malnutrition screening and treatment with oral nutritional supplements are essential in improving the health of older Chinese adults living in the community, and potentially lowering the costs of healthcare.