This study investigates the role of liquidity in explaining stock returns in Chinese stock markets. We construct a new liquidity measure by capturing four dimensions of liquidity. Results show that liquidity is an important factor in pricing returns in China after taking well-documented asset-pricing factors into consideration. The results are valid on both time-series and cross-sectional tests. They are also robust to adding portfolio residuals, higher moments, monthly seasonality, and conditional-market tests. We compare alternative factor models and find that the model with market, size, and liquidity as factors outperform other factor models for explaining stock returns in China.