Free indirect discourse (FID) is a discourse presentation pattern of third-person narration, and it is often employed as a common narrative strategy to present characters’ consciousness in literary works. Given its ambiguous link with both the narrator’s and character’s discourse, we may feel confused about how to distinguish FID from other discourse when reading a text. After introducing the basic definition of this notion, this paper will interpret several signals which can help to distinguish FID passages in the text. Most importantly, this paper will look at how FID passages in Western literary works were translated into Chinese in early works, and then explore the development of FID in early Chinese fiction, investigating the transition of FID in Chinese.