In this study, I will examine how Lu Xun, Lao She and Ba Jin in novels and short stories written between 1900-1950 draw on ancient Chinese cosmopolitan literary traditions as well as indigenous vernacular and popular modes of storytelling, in addition to “modern” Western vernacular models of fiction writing, creating multi-layered “modern” hybrid modes of Chinese fiction writing. I will analyze these novels and short stories with regard to genre, content, language and style, and in their specific historical and cultural context. My study explores the complex fusions and tensions in these texts with regard to exchanges between foreign/domestic, cosmopolitan/ provincial, classical/ popular, hybrid/ authentic, in their historical and cultural context. Through discussing the research results in the context of contemporary transcultural theories of  world literature and cosmopolitan and vernacular dynamics in world literature (by Appiah, Bhabha, Moretti, Pollock and others) this study will contribute to the development of these theories, as well as question the validity of some them, based on findings in early twentieth century Chinese novels and short stories.