Can bilingual exposure impact children's neural circuitry for learning to read? To answer this question, we investigated the brain bases of morphological awareness, one of the key spoken language abilities for learning to read in English and Chinese. Bilingual Chinese‐English and monolingual English children (N = 22, ages 7–12) completed morphological tasks that best characterize each of their languages: compound morphology in Chinese (e.g. basket + ball = basketball) and derivational morphology in English (e.g. re + do = redo). In contrast to monolinguals, bilinguals showed greater activation in the left middle temporal region, suggesting that bilingual exposure to Chinese impacts the functionality of brain regions supporting semantic abilities. Similar to monolinguals, bilinguals showed greater activation in the left inferior frontal region [BA 45] in English than Chinese, suggesting that young bilinguals form language‐specific neural representations. The findings offer new insights to inform bilingual and cross‐linguistic models of language and literacy acquisition. The study investigated the impact of bilingual exposure on children's language and reading abilities. During auditory morphological awareness tasks, young Chinese‐English bilinguals showed monolingual‐like competence as well as language‐specific patterns of brain activation in left inferior frontal gyrus (IFG). This activation was greater for English than for Chinese in left IFG BA 45, but similar across languages in left IFG BA 47. Relative to English monolinguals, the bilinguals showed greater activation in left MTG region and this activation was significantly correlated with bilinguals’ English literacy. The findings suggest that bilingual exposure to a language with rich lexical morphology, such as Chinese, impacts the functionality of bilinguals’ left temporal regions typically associated with lexico‐semantic processing and the ability to link word meanings to their orthographic forms.