We used longitudinal cohort data to explore the association between self-reported hearing difficulty (SHD) and cognitive as well as physical functioning, and whether the association is mediated by social isolation. 16,786 observations from participants aged 65 and older in two waves of the Chinese Longitudinal Healthy Longevity Survey, a community-based cohort study, were analyzed. Cognitive impairment was assessed using the Chinese version of the Mini Mental State Examination (MMSE). Activities of daily living (ADL) and instrumental activities of daily living (IADL) were used as indicators of physical functioning. Generalized structural equation modelling (GSEM) analysis showed that SHD increased the risk cognitive impairment (odds ratio [OR] = 2.93, 95 % confidence intervals [CI] 2.61-3.30), ADL disability (OR = 2.10, 95 % CI 1.86-2.38), and IADL disability (OR = 2.39, 95 % CI 2.12-2.68). Social isolation mediated the association of SHD with cognitive functioning, but not with physical functioning. SHD was positively associated with social isolation (OR = 1.23, 95 % CI 1.07-1.42), and social isolation was significantly associated with cognitive impairment (OR = 2.09, 95 % CI 1.74-2.50). Indirect effects of SHD explained 12.3 % of the variance in cognitive impairment via social isolation. SHD was associated with adverse cognitive and physical functioning in older adults. Cognitive but not physical functioning was indirectly influenced by SHD via social isolation.