This study estimates the causal effect of physical exercise on health and happiness for Chinese junior high school students. We use a longitudinal database from the China Education Panel Survey (CEPS) which allows us to deal with the potential endogeneity of physical exercise by considering the use of instrumental variables and propensity score matching. Our findings suggest that physical exercise has a significantly positive effect on health, and also marginally improves students’ happiness. Moreover, these improvements affect all types of students, even those relatively unhappy or in poor health. It is also found that the positive impact on health is higher for females, rural and low-income students and for students attending to schools subjected to high academic pressure.