Diglossia is defined as the use of one official language in a formal context (e.g., school), including reading and writing, and an unofficial language in an informal context (e.g., home). Many Chinese children have experienced diglossia. However, the impact of diglossia on Chinese children's literacy development remains unclear. To examine the impact of diglossia on that development, we explored the diglossia effect in a group of Mandarin-Cantonese-speaking Chinese children. One hundred and twenty-three third-grade and sixth-grade students from a primary school were tested for non-verbal intelligence, phonological awareness, morphological awareness, delayed copying, word reading, and word dictation. The results of between-subjects analysis of covariance revealed that children growing up in a diglossic context scored significantly lower in terms of morphological and phonological awareness than their nondiglossic peers. We noted a slightly positive effect of diglossia on word dictation in third graders. In addition, multiple-group path analyses from metalinguistic skills to word reading and dictation showed different patterns in the diglossic and nondiglossic groups. These findings confirm the impact of diglossia on Chinese children's literacy development while highlighting the complexity of the effects of diglossia.