Following the Battle of Shanghai of 1937, the cabinet of Japanese Prime Minister Fumimaro Konoe pushed for a quick and diplomatic settlement to the war in China, and not an expensive and long-term occupation (see Trautmann mediation).

After his release from prison, he fled to Kwantung Leased Territory (modern Lüshunkou, Dalian), and lived several years under Japanese protection, nursing his hatred for Chiang.

[1] However, Fu was unwilling to head the new government himself, and recommended Su Xiwen, a professor of religious philosophy and political science at the Chizhi University in Jiangwan.

Su was also known for his views on Buddhist-Daoist syncretism, which influenced the name of the new administration—the "Great Way" referring to Eastern philosophy's concept of the Tao—and its flag: the yin-yang symbol of Daoism on a yellow background.

However, neither Su nor his Great Way Government were regarded seriously by Japanese political agents, who looked with dismay and contempt at the assortment of criminals, religious cultists, and narcotics dealers who gravitated to leading positions in the new administration.