During the period between 1985 and 1988, Northeast Asia underwent great changes. After 1985, relations between Beijing and Moscow were drastically improving. Both China and the Soviet Union began to take a more positive approach toward South Korea. Since 1985, there have been affirmative and substantial improvements in Sino-South Korean relations politically and economically. The gradual improvement in Sino-South Korean relations was spurred ahead by the 1985 Chinese torpedo boat incident. Through the incident, Seoul and Beijing engaged in official negotiations. This incident provided both China and South Korea with an opportunity to develop new relations. Soon after the torpedo boat incident, China announced its participation in the 1986 Seoul Asian Games despite North Korea’s strong objection. The most dramatic breakthrough in Sino-South Korean relations was China’s participation in the 1988 Seoul Olympic Games despite North Korea’s boycott. The Games played an important role in promoting China’s positive perception of South Korea. Since the Asian Games and Olympic Games, the volume of trade between China and South Korea has grown by leaps and bounds. Bilateral trade has constantly raised the level of economic cooperation and has gradually facilitated the political rapprochement between Beijing and Seoul. To examine the factors why China changed to a de facto “Two Koreas” policy during the period between 1985 and 1988, I address the following issues: Sino-Soviet détente, Chinese torpedo boat incident, China’s sports diplomacy, and China’s economic diplomacy.