Abstract: Data from CLDS 2016 has been employed to empirically test the influence and mechanism of exercise as well as social capital on the physical and mental health of urban and rural residents in China. It is found that the effect of exercise on health improvement is mediated by social capital. Sports participation improves mental and physical health of residents directly and indirectly by increasing their collective and individual social capital. When separating the sample into urban and rural groups, the effect of exercise on mental and physical health is found significant only in the urban residents group. For rural residents, exercise acts more likely as a way to increase collective and individual social capital, which further improves their mental and physical health. Comparing to urban residents, the mediating effect of social capital is stronger for rural residents.