The film tells the story of Li Tian-lu (1910-1998), who becomes a master puppeteer but is faced with demands to turn his skills to propaganda during the Japanese occupation of Taiwan in World War II.

Scenes from his childhood and early adulthood are intercut with puppet performances and newly-filmed interviews of Li recounting his life as he's swept up in Taiwan's tumultuous history.

A City of Sadness (1989) covered the four years between the end of World War II and the retreat of the Kuomintang to Taiwan in 1949, when Taipei was declared the “temporary” capital of the Republic of China.

The film is structured around a series of ellipsis, which Hou has compared to traditional Chinese opera: "It simply gives you a scene without much of a clear narrative, unlike Western drama where all the elements must be put in place.

Critic Jonathan Rosenbaum observed that "the only rough parallel I can think of in Hollywood filmmaking is the use of real-life 'witnesses' in Warren Beatty’s Reds, but here it's as if John Reed himself, not people remembering him, suddenly appeared on-screen.

[5] Jim Hoberman of The Village Voice hailed it as the best film of 1993 and one of the ten best of the 1990s,[6] writing later that "it was for The Puppetmaster that Taiwanese master filmmaker Hou Hsiao-hsien first developed a startlingly advanced form of montage that has been compared to the movement of clouds drifting across the sky.