Reading three-character Chinese compound words was studied in two experiments using the lexical decision task and the eye-tracking technology to examine the extent to which they are recognised via their components. To this end, the frequency of the first character was manipulated in a continuous manner separately for two kinds of word structure: those where the first character formed an independent constituent (A-BC words) and those where it was a part of an embedded compound word (AB-C words). The study found evidence for both compositional and holistic processing. Moreover, A-BC words were read somewhat faster than AB-C words in the sentence context but not in isolation. Word-internal structure also affected the way attention was allocated within words. The pattern of results is consistent with parallel dual route models of compound word reading. It is concluded that Chinese readers demonstrate flexibility in using compositional and holistic processing in reading three-character words.