Studies have shown that institutionalized older adults have worse psychological health than their community-residing counterparts. However, much less is known about this association in developing countries such as China with a rapidly aging population and a short history of institutional care. This article investigates the role of children in differences in psychological well-being between institutionalized and community-residing oldest-old adults in China. Using national data from the 1998, 2000, and 2002 waves of the Chinese Longitudinal Healthy Longevity Survey, results show that the institutionalized have significantly better psychological health-measured by positive affect, loneliness, and quality of life-than those living in the community. Furthermore, we find that the associations are moderated by child-related factors (number of children, proximity, and visits) and strengthened for the three measures of psychological well-being after adjustments for socioeconomic factors, social support, health behaviors, and health status. The results underscore the importance of family dynamics for the psychological health of the institutionalized population in a historically family-care oriented society.