Social dysfunction, manifested by impaired social cognition, is contributing to poorer prognosis of patients with schizophrenia. Growing evidence indicates that oxytocin acts as a neurotransmitter in the regulation of social cognition. It still lacks a thorough understanding of how oxytocin is linked with deficits in social cognition and social functioning in schizophrenia. To this end, we aimed to study the role of plasma oxytocin levels in the relationship between subdomains of social cognition and social dysfunction in patients with schizophrenia. Social Functioning Scale was administered to measure social dysfunction while Faux Pas Recognition Test was used to assess the Theory of Mind (ToM) in 40 patients with schizophrenia and 40 age-matched healthy controls. Patients with schizophrenia exhibited more deficits in ToM, more severe social dysfunction, and had lower plasma oxytocin levels, relative to healthy controls. A pooled correlation analysis of all participants revealed significant effects of plasma oxytocin levels on the ToM and social dysfunction. In patients with schizophrenia, plasma oxytocin levels were positively correlated with the affective but not cognitive component of the ToM, and the effects of plasma oxytocin levels on social functioning were partially mediated by affective ToM. Our findings underscore the importance of oxytocin as a potential predictor of ToM and social functioning in patients with schizophrenia. It may be worthwhile for future studies of oxytocin in schizophrenia to focus on an affected behavioral domain, e.g., social cognition, rather than diagnosis, and the targeted domain should be deconstructed into more detailed subdomains.