From1989-1992, Northeast Asia underwent great changes. In 1989, China and the Soviet Union normalized relations after a 30-year rift. Sino-Soviet normalization heightened expectations for peace and stability on the Korean peninsula. Regardless of North Korea, China could expand its economic ties with South Korea. South Korea’s Northern Policy gave top priority to establishing diplomatic ties with China. Chinese leaders reacted positively. As a result of the Northern Policy, non-political interchange between China and South Korea intensified to the degree that they played a large role in establishing diplomatic relations between the two countries in 1992. South Korean-Soviet normalization stopped the longstanding ideological and geopolitical Sino-Soviet rivalry over North Korea. For China, South Korean-Soviet normalization provided a convenient cover for its own shift to a “Two Koreas” policy. The most impressive development in Sino-South Korean relations was in the economic sphere. The most decisive factor in establishing full diplomatic ties with South Korea was Deng Xiaoping’s recognition of South Korea’s value for stepping up China’s “Four Modernizations” program. This article analyzes why China normalized relations with South Korea. It addresses the following issues: Sino-Soviet Normalization, South Korea’s Northern Policy, South Korean-Soviet Normalization, and China’s Economic Diplomacy.