<p>This study examined how sentence context influences the processing of Chinese compound words during reading. More specifically, we investigated whether the processing of compound words—whether they are interpreted as a whole or decomposed into their constituent parts—is influenced by sentence context. We orthogonally manipulated the plausibility of the first constituent word and that of the whole compound word within a sentence. Readers’ eye movements were recorded as they read these sentences. Results revealed an interactive effect of whole-word plausibility and constituent-word plausibility on gaze duration. When the whole compound word was temporarily implausible, gaze durations were longer when the first constituent word was plausible than when it was implausible. However, this inhibitory effect of the constituent word disappeared when the compound word was contextually plausible. These findings suggest that sentence context influences an early stage of compound word processing. Readers tend to process a compound word holistically when it is contextually plausible but process constitutes as separate words when the word is implausible in context. Based on these results, we propose improvements to Chinese reading models, emphasizing the role of contextual information in lexical competition—where plausible words supported by context are more likely to be segmented. Our findings contribute to a more nuanced understanding of compound word processing, providing a new perspective other than the traditional dichotomy between holistic and decompositional processing.</p>