The present study investigated the neurophysiological correlates of categorical perception of Chinese lexical tones in Mandarin Chinese. Relative to standard stimuli, both within- and across-category deviants elicited mismatch negativity (MMN) in bilateral frontal-central recording sites. The MMN elicited in the right sites was marginally larger than in the left sites, which reflects the role of the right hemisphere in acoustic processing. At the same time, relative to within-category deviants, the across-category deviants elicited larger MMN in the left recording sites, reflecting the long-term phonemic traces of lexical tones. These results provide strong neurophysiological evidence in support of categorical perception of lexical tones in Chinese. More important, they demonstrate that acoustic and phonological information is processed in parallel within the MMN time window for the perception of lexical tones. Finally, homologous nonspeech stimuli elicited similar MMN patterns, indicating that lexical tone knowledge influences the perception of nonspeech signals.