This prefecture is in the southern part of a historical region called Kham, which belonged to the Tibetan Empire many centuries ago. After the decline of that empire in the 9th century, peripheral areas like southern Kham remained part of Tibet more in an ethnographical than a political sense. As a practical matter, by the mid-1700s, the Tibetan Government had mostly lost control of Kham to Manchu (Qing) China, and that situation lasted until the end of the Manchu Dynasty in 1912.
Southern Kham along with other parts of Yunnan were ruled by the Yunnan clique from 1915 until 1927. Then it was controlled by Governor and warlord Long (Lung) Yun until near the end of the Chinese Civil War, when Du Yuming removed him under the order of Chiang Kai-shek.
There are three counties in this prefecture: Shangri-La (formerly Zhongdian, in Chinese: 中甸 Zhōngdiàn), Dêqên County, and Weixi Lisu Autonomous County (formerly Weixi), and they all were under the administration of Lijiang. The Autonomous Prefecture was established in 1957 and named “Diqing” by its first governor.
During the remainder of the 20th century, the prefecture’s capital was called Zhongdian but was renamed on December 17, 2001 as Shangri-La City (other spellings: Semkyi’nyida, Xianggelila, or Xamgyi’nyilha) after the fictional land of Shangri-La in the 1933 James Hilton novel Lost Horizon, with an eye toward promoting tourism in the area.
On June 25, 2007 the Pudacuo National Park was established on 500 square miles (1,300 km2) in this prefecture. On January 11, 2014, there was a major fire in the 1,000-year-old Dukezong Tibetan neighborhood of the capital city Shangri-La, causing much damage and hardship.