Objective: The aim of this study was to investigate the impact of illiteracy on physical health and mental health. Design: Matching methods (nearest neighbour matching, Mahalanobis metric matching, and propensity score matching). Setting: Elderly people at least 65 years old in 22 provinces of China. Methods: The analysis used data from Chinese Longitudinal Healthy Longevity Survey (CLHLS). The independent variable was a dummy variable, which was coded as 1 for illiterate or semiliterate, and 0 for literate. Dependent variables were indicators of physical and mental health derived from the survey results. Matching methodologies controlled for confounding variables including age, sex, living sites, access to tap water and financial support. Results: Illiteracy was found to have a significant impact on physical health, exercise habits, anxiety, loneliness and happiness. On average, illiteracy decreased physical health by 19.9%, decreased exercise habits by 7%, increased anxiety by 11.56%, increased loneliness by 17.6% and decreased happiness by 11.3%. Conclusion: Findings confirm the past literature in which illiteracy has been found to be adversely associated with physical and mental health. The analysis uniquely found that illiteracy had a higher cost on mental health as compared to physical health for elderly people in China.