Nanzhao was formed by the unification of six Tai kingdoms in 729. Piluoge, the leader of one small tribal state, extended his control over the five neighbouring kingdoms while acting in alliance with China, which needed an ally against the aggressive Tibetans. Once unification was complete, Piluoge established Nanzhao's centre of power near Lake Er. Geographic factors rendered the capital impregnable, and two Chinese attacks were repulsed in 751 and 754. Nanzhao was also able to dominate the East-West trade routes from China and Tongking through Myanmar (Burma) to India. By the 9th century Nanzhao had become an imperialistic state waging war deep into Myanmar in 832 and into Tongking in 862.

Nanzhao attained a high level of culture. Skilled artisans taught the weaving of cotton and silk gauze. Salt and gold were mined in many parts of the kingdom, and a complex system of government and administration was developed.

Nanzhao declined during the late 9th century and fell in 902, when a rebel official killed its last emperor and set up a new state. The Mongols under the leadership of Kublai Khan conquered the area in 1253. During the preceding two centuries, however, the Tai had been moving southward in large numbers, eventually forming the bulk of the population in what is present-day Thailand.