During the period between 1949 and 1978, China maintained close relations with North Korea and totally ignored South Korea. In other words, China pursued a “One Korea” policy. But China started to change to a “Two Koreas” policy gradually during the period between 1979 and 1984. In December 1978, Deng Xiaoping adopted bold economic reforms and open door policy at the Third Plenum of the 11th Central Committee of the Communist Party of China (CCCPC). China’s policy toward the Korean peninsula also entered a new phase. China employed a step by step conciliatory policy towards South Korea from the late 1970s, despite China’s strong ties with North Korea. This article analyzes the reasons why China started to change to a “Two Koreas” policy gradually during the period between 1979 and 1984. To do so, I address the following issues: the Third Plenum of the 11th CCCPC, Determinants of Chinese Foreign Policy, China’s Flexibility towards South Korea, the Hijacking of a Chinese Aircraft to South Korea in May 1983, North Korea’s Terrorism in October 1983 and China’s Role as an intermediary, and Sino-South Korean Economic Relations.