The purpose of this paper is to examine the impact of baseline socio-economic factors on functional status decline over a period of 3 years among a sample of Chinese older men and women, using the China Health and Nutrition Surveys of 1997 and 2000. In addition, the study tries to determine whether risk differentials by these socio-economic factors can be explained by other demographic, health-related and nutritional risk factors. The eligible study population was defined as women and men aged 55 years and over who at baseline were free from any form of disablement in activities of daily living (ADLs) or instrumental activities of daily living (IADL) tasks. Among subjects with complete data at followed-up (N = 976), the overall incidence proportions of any functional status decline, IADL only and ADL declines were 25.8%, 18.9% and 6.9%, respectively. Our study found that education is strongly and inversely associated with incidence of combined functional status decline and IADL only but not with the onset of ADL disability. Similarly, household income per capita was inversely associated with functional status decline and IADL disability incidence, with a clear dose-response relationship, even after adjustment for age and gender. However, multivariate analysis demonstrated that the latter association was highly confounded by other demographic factors, especially urban-rural area of residence. Using a combined measure of socio-economic status that includes years of education and household income per capita, the age and gender-adjusted odds ratio for functional status decline and belonging to lower SES class as compared to middle, upper middle and upper classes was 3.82 (95% CI: 2.15, 6.77) and 2.77 (95% CI: 1.52, 5.03) after further adjustment for urban-rural area of residence and living arrangements. Hence, there are wide socio-economic disparities in the functional health of older adults in China, although such disparities are more seen for IADL decline and are almost exclusively attributed to differentials in educational attainment. Finally, nutritional and health-related risk factors do not seem to act as intermediate factors in this association and hence further research should try to uncover other mechanisms by which SES affects changes in functional health among older adults in China.