Midlatitude regions experienced frequent droughts during the twentieth century, but their impacts on terrestrial carbon balance are unclear. This paper presents a century-scale study of drought effects on the carbon balance of terrestrial ecosystems in China. The authors first characterized the severe extended droughts over the period 1901–2002 using the Palmer drought severity index and then examined how these droughts affected the terrestrial carbon dynamics using tree-ring width chronologies and a process-based biogeochemistry model, the Terrestrial Ecosystem Model (TEM). It is found that China suffered from a series of severe extended droughts during the twentieth century. The major drought periods included 1920–30, 1939–47, 1956–58, 1960–63, 1965–68, 1978–80, and 1999–2002. Most droughts generally reduced net primary productivity (NPP) and net ecosystem productivity (NEP) in large parts of drought-affected areas. Moreover, some of the droughts substantially reduced the countrywide annual NPP and NEP. Out of the seven droughts, three (1920–30, 1965–68, and 1978–80) caused the countrywide terrestrial ecosystems to switch from a carbon sink to a source, and one (1960–63) substantially reduced the magnitude of the countrywide terrestrial carbon sink. Strong decreases in NPP were mainly responsible for the anomalies in annual NEP during these drought periods. Changes in heterotrophic respiration happened in the same direction, but mostly with smaller magnitude. The results show that severe extended droughts had significant effects on terrestrial carbon cycling in China, although future studies should consider other important processes such as drought-induced mortality and regrowth, land-use change, disturbances (e.g., fire), human management (e.g., fertilization and irrigation), and environmental pollution (e.g., ozone pollution, nitrogen deposition). These drought effects are of particular importance in light of projected widespread summer drying in midlatitude regions during the twenty-first century. Future droughts could lead to a reduced terrestrial carbon sink or even a source and exert a positive feedback to the global climate system.