The purpose of this study was to investigate the relationship between morphological awareness and Chinese children's literacy development. Of the 169 children from elementary schools in Beijing, China, who participated in the study, about half received enhanced instruction on the morphology of characters and words in the first and second grade. At the beginning of second grade and at the beginning of third grade, children were tested on morphological awareness, reading, and writing. The results showed that morphological instruction substantially improved children's performance on the morphological awareness and literacy measures. The best-fitting structural equation models suggested a unidirectional causal relation in early second grade and a reciprocal relation in early third grade between morphological awareness and children's literacy development. (Contains 5 tables, 2 figures, and 3 footnotes.)