The observatory began humbly on March 1, 1898, as a temporary unit of the German Navy Port Surveying Department, measuring temperature, humidity, rainfall, and wind. By 1904, it had expanded into astronomy and timekeeping. The move to Guanxiang Mountain came on May 10, 1905, and by 1909 the facility was recording topographic surveys, geomagnetic fields, seismic activity, tidal patterns, and sunspot observations. On January 1, 1911, it was renamed the Royal Observatory of Qingdao. The main building was completed on January 9, 1912, with laboratories, a library, public reading rooms, a temperature-controlled basement for precision clocks, and a metalwork workshop. By the end of Germany's lease in 1914, the observatory had spawned more than ten subsidiary stations along the Jiaoji Railway between Qingdao and Jinan. Together with Shanghai's Xujiahui Observatory and the Hong Kong Observatory, Qingdao earned a place among the Three Great Observatories of the Far East.

Japan's seizure of Qingdao in 1914 brought the observatory under new management, but the Japanese proved reluctant to leave even after China formally reclaimed the city in 1922. Japanese personnel continued using the instruments and sending data back to Tokyo, while Chinese authorities and the Japanese government engaged in diplomatic negotiations that went nowhere. In March 1932, the observatory began daily high-altitude observations using pilot balloons, eventually providing data to China Airlines for flight safety. But the July 7th Incident of 1937 ended this productive period. Observatory staff evacuated in September, and the Japanese navy occupied Qingdao in January 1938. When Wang Huawen, the first postwar director, arrived to take charge after Japan's surrender in August 1945, he found the facility devastated. Many instruments had been destroyed by Japanese military police during the occupation.

Wang Huawen spent years restoring the observatory before the People's Liberation Army entered Qingdao on June 2, 1949. The astronomy section was eventually affiliated with the Chinese Academy of Sciences' Purple Mountain Observatory, while the office building became home to the Marine Hydrological and Meteorological Centre of the Navy's North Sea Fleet. The original dome room, built in 1931, remains in active use for astronomical observation. An expanded section added in 1996 now houses a youth hostel -- one of the few places in China where visitors can sleep inside a national key cultural relics site. The observatory was recognized as a national science education center in 2012 and opens periodically for public stargazing events and astronomical summer camps. Its granite walls, fuchsia-tiled ground floor, and castellated tower still look remarkably like the European fortress its German builders intended, a stone sentinel on a hilltop that has watched the sky through three occupations, two world wars, and a revolution.