Starting from the late Qing, the genre, style, content of the Chinese novel has demonstrated a conspicuous difference with those of the traditional one. Scholars have tried to designate this phenomenon as “the modern revolution,” “modernized paradigm,” “progress of ideas,” or “change of the mode of narration” of “Chinese novel.” Although many important works have adopted a variety of horizons to explain this phenomenon, many of them overlook the crucial facts that in the very period a change has also occurred to the meaning of the term xiaoshuo itself. This was largely the result of a process of literal translation and cultural transference through the medium of Meiji Japan, and that this change has influenced the novel writers” understanding of their own works to a large extent. Indeed the Chinese term xiaoshuo 小說, its Japanese equivalent shōsetsu 小說, and the English term “novel” have very different meanings in their respective historical context and literary tradition. This paper tries to demonstrate that the term shuosetsu 小說 (xiaoshuo), like the terms bungaku 文學 (wenxue), tetsugaku 哲學 (zhexue), or jiyu 自由 (ziyou), all of which are etymologized and extracted from the Chinese classics, was made as a translation term for Western idea which was produced in different historical period. It is a lucid fact that the traditional idea of xiaoshuo came from the “Yiwenchi 藝文志” (dynastic bibliography) of the Hanshu 漢書 (History of the Former Han Dynasty). Tsubouchi Shōyō 坪內逍遙 (1859-1935), a gigantic literary literary critic at Meiji Japan, used the Japanese word shōsetsu (しょうせつ) (with the same Chinese character 小說) to translate the word novel (ノベル) in his groundbreaking book on the theory of novel --“The essence of the novel (1884-1885)” in order to differentiate the genre of “romance” in Western tradition and “monogatari” in the Japanese tradition. Liang Qichao 梁啟超 (1873-1929) received this idea during his exile in Japan. Although his intention was to enlighten the Chinese and bring salvation to his nation, he had also changed the function of the novel and ascended its value in the literary hierarchy with his provocation of “revolution of literature” and “revolution of fiction.” This paper investigates the process of trasnlation and cultural transference through the perspective of translation. With this as the departure point, it will investigate how the Chinese xiaoshuo, through this detouring process, has ever since estranged from the category of Zi within the traditional classification of Classics (jing 經), History (shi 史), Philosophers (zi 子), and Belles-lettres (ji 集) and become one of four major genres of “literature,” together with Drama, Poetry, and Prose.