This essay presents the genealogy of a category of writing, the Chinese xiao shuo (fiction), by tracing the historical changes in its contents and significations. Zhuang Zi, Xun Zi and Huan Tan defined xiao shuo (“small talk”) as an inferior category of writing, due to its insignificant “contents,” in relation to the great dao of official discourse. Ban Gu was more interested in its “form”: by associating xiao shuo with bai guan, he changed our conception of the origin of xiao shuo, for now it was no longer associated with the elitists’ studies and offices but rather was seen to have sprung from the streets and farmers’ fields. I note that Ban Gu established the first connection between Confucius and xiao shuo by falsely attributing to the Confucian Lunyu the statement (which also could not possibly refer to xiao shuo), “Even though it is [a] small Dao, it must possess something worth knowing.” By the time the expression xiao shuo was finally applied to storytelling during the Tang Dynasty, it had already become a term loaded with meaning and value from its association with other forms of writing. Juxtaposing xiao shuo with the Western term “fiction,” I conclude that unlike “fiction,” which has always denoted the dualism of truth and falsehood (Platonic tradition), xiao shuo primarily signified a value judgment based on the dichotomy between “small talk” and “great Dao” (Confucian/Daoist tradition). The xiao shuo was not a genre of literature (in the modern Western sense) in pre-modern China, and the current translation of xiao shuo as “fiction” (or “novel”) is really an importing of European history/philosophy into Chinese culture.