Ever since Liang Qichao launched several seminal articles at the turn of twentieth-century, advocating the use of fiction to further the cause of national survival, Chinese fiction had stepped into another stage of development. This “New Fiction” was meant to be distinct from traditional fiction, which late Qing intellectuals saw as detrimental to the nation. However, can this “New Fiction” be treated as “modern fiction” as some scholars claim? This article takes a different position, seeing late Qing fiction as transitional, bringing in political ideas and issues unseen in traditional fiction, but in some other aspects remaining the same. It was not until Lu Xun and his generation that the so-called “modernization of Chinese fiction” took place. This article will look into Lu Xun’s discourse on fiction in ate Qing period and his later creative fiction, to analyze his concept of fiction, and his contribution to the formation of modern Chinese fiction.