The present study explores the relationship between basic auditory processing of sound rise time, frequency, duration and intensity, phonological skills (onset-rime and tone awareness, sound blending, RAN, and phonological memory) and reading disability in Chinese. A series of psychometric, literacy, phonological, auditory, and character processing tasks were given to 73 native speakers of Mandarin with an average age of 9.7 years. Twenty-six children had developmental dyslexia, 29 were chronological age-matched controls (CA controls) and 18 were reading-matched controls (RL controls). Chinese children with dyslexia were significantly poorer than CA controls in almost all phonological tasks, in semantic radical search, and in phonological recoding proficiency. Chinese children with dyslexia also showed significant impairments in most of the basic auditory processing tasks. Regression analyses demonstrated that different auditory measures of rise time discrimination were the strongest predictors of individual differences in Chinese character reading (1 Rise task) and phonological recoding (2 Rise task) respectively, with frequency discrimination also important for nonsense syllable decoding. Our results support the hypothesis that accurate perception of the amplitude envelope of speech is critical for phonological development and consequently reading acquisition across languages.