This paper argues that President Lee Teng-Hui's intention to enhance the legal status of Taiwan in mid-1998 is the major reason behind his launching of the ”two-state” theory in July 1999. By dividing the policymaking process of the ”two-state” theory into two parts - (a) the reasons for Lee's preparation of the policy change in 1998 and (b) his announcement of the policy change in 1999 - this article provides an insight into why the Lee administration moved away from its original China policy and instead promoted the ”two-state” theory. The application of Lee's motives for the policy change in mid-1998 to the research into the ”two-state” theory leads to the introduction of two new contributing factors to the literature dealing with this policy shift; first, the influence of domestic politics needs be downplayed, if not excluded, and, secondly, external factors, hitherto under-acknowledged or ignored, are identified.