Objectives: Type 2 diabetes mellitus (T2DM) shares a complex relationship with bone metabolism and few studies investigated the effect of impaired bone health on the risk of T2DM. This study was conducted to investigate the association between hip fractures and the risk of incident T2DM. Methods: This is a retrospective cohort study using data from the real-world hip fracture cohort. Hong Kong Chinese patients aged ≥ 65 years without T2DM who were admitted to public hospitals due to a fall between 2008 and 2015 were included in the study. Patients who sustained falls with and without hip fractures were matched by propensity score (PS) at a 1:1 ratio. Competing risk regression was used to evaluate the association between hip fracture and incident T2DM, with death being the competing event. Results: A total of 23,314 hip fracture cases were matched to 23,314 controls. The median follow-up time was 5.09 years. The incidence rate of T2DM was 11.947 and 14.505 per 1000 person-years for the hip fracture and control group respectively. After accounting for the competing risk of death, the hip fracture group had a significantly lower risk of developing T2DM (HR: 0.771, 95% CI: 0.719–0.827). Similar results were observed in all subgroups after stratification by age and sex. Conclusions Hip fracture was found to be associated with a reduced risk of T2DM. These findings provide insight into the topic of bone and glucose metabolism and prompt further research in evaluating the role of bone health in the management of T2DM.