We present new estimates on evaporation and groundwater recharge in the Badain Jaran Desert, western Inner Mongolia of northwestern China, based on a modified Penman Equation suitable for lakes in China. Geochemical data and water balance calculations suggest that local rainfall makes a significant contribution to groundwater recharge and that past lake-level variations in this desert environment should reflect palaeoclimatic changes. The chronology of lake-level change, established by radiocarbon and U-series disequilibrium dating methods, indicates high lake levels and a wetter climate beginning at ca. 10 ka and lasting until the late mid-Holocene in the Badain Jaran Desert. The greatest extension of lakes in the inter-dune depressions indicates that the water availability was greatest during the mid-Holocene. Relicts of Neolithic tools and pottery of Qijia Culture (2400–1900 BC) suggest relatively intensive human activity in the Badain Jaran Desert during the early and middle Holocene, supporting our interpretation of a less harsh environment. Wetter climates during the Holocene were likely triggered by an intensified East Asian summer monsoon associated with strong insolation.