Dementia has been increasingly paid attention by policymakers in China. However, the majority of the public has an indistinct concept of dementia and its diagnostic criteria. Therefore, many abnormal characteristics and actions of older people are labeled as having dementia while diagnosed without dementia. We examined a multi-stage cluster sample of 11,223 participants aged 60 years and above who have been clinically confirmed by general practitioners as not having dementia in 2013, and 7,861 participants were willing to participate the following study and were followed-up in 2014. To assess the differences of status of older people who were mistakenly labeled as having dementia or not, we asked main caregivers 'Do you think this older person suffers from dementia?', and found out that 244 participants had been mistakenly labeled as having dementia since 2013. Related effects were measured using international generic scales as well, and the results showed that participants with better physical status deteriorated more rapidly if they were mistakenly labeled as having dementia. Additionally, the mental health of these 244 participants also deteriorated more quickly. Older adults that were not labeled as having dementia were more willing to participate in social activities relative to their labeled counterparts. In conclusion, being mistakenly labeled as having dementia without a medical diagnosis impaired older adults' physical functioning and mental health. Moreover, the reduction of social activities of labeled older people leads to separation and social exclusion.