To examine the relationship between loneliness and cognitive function and to explore the mediating role of physical health on the loneliness-cognition relationship in Chinese older adults (OAs). Data came from a nationally representative sample of 14,199 Chinese OAs (aged 65+) from 2002, 2005, 2008, and 2011 waves of the Chinese Longitudinal Healthy Longevity Survey. A latent variable cross-lagged panel model combined with mediation analysis was used to determine the relationship between loneliness and cognitive function and the mediating effect of increase in the number of chronic conditions (ΔNCCs) on the ascertained loneliness-cognition relationship. Severe loneliness at prior assessment points was significantly associated with poorer cognitive function at subsequent assessments, and vice versa. The ΔNCCs partially mediated this prospective reciprocal relationships, accounting for 2.58% of the total effect of loneliness on cognition and 4.44% of the total effect of cognition on loneliness, respectively. Loneliness may predict subsequent cognitive decline, and vice versa. This loneliness-cognition relationship is partially explained by their impact on physical health. Multidisciplinary interventions aimed at reducing loneliness and cognitive decline per se and their associated risk factors as well as improving chronic illness management would be beneficial for emotional well-being and cognitive health in OAs.