In recent years the concept of ‘soft power’, popularized by the work of Joseph Nye, has gained currency in both China and Taiwan. This paper explores how the Chinese and Taiwanese understand soft power and its sources, and how their understanding differs from Nye's formulation. It discusses why this foreign concept has become so salient in the Chinese and the Taiwanese discourse. It also examines the impact of this concept on the external policies of China and Taiwan. The paper concludes by pointing out the limitations of the concept of soft power.