Yuan's rise to fame began with his nominal participation in the First Sino-Japanese War as commander of the Chinese garrison forces in Korea. Unlike other officers, however, he avoided the humiliation of Chinese defeat by having been recalled to Beijing several days before the outbreak of the conflict.

As an ally of Li Hongzhang, Yuan was appointed the commander of the first New Army in 1895. As the officer most directly responsible for training China's first modernized army, Yuan gained significant political influence and the loyalty of a nucleus of young officers: by 1901, five of China's seven divisional commanders and most other senior military officers in China were his protégés. The Qing Court relied heavily on his army due to the proximity of its garrison to the capital. Of the new armies that were part of the Self-Strengthening Movement, Yuan's was the best trained and most effective.

Yuan famously betrayed the Guangxu Emperor when Cixi planned the coup to end the Hundred Days Reform. 

During the Boxer Rebellion, Yuan took the side of the pro-foreign faction in the Imperial Court, and refused to attack the Eight Nation Alliance forces, but joined with other Chinese governors whose modernized armies did not participate in the Boxer Rebellion. He ignored Cixi's declaration of war against the foreign powers and continued to suppress the Boxers. Furthermore, Yuan and his army helped the Eight Nation Alliance massacre tens of thousands of people in their anti- Boxer campaign after the Alliance captured Beijing. 

In June 1902 Yuan was promoted to Viceroy of Zhili, Commissioner for North China Trade, and Minister of Beiyang, comprising the modernized regions of Liaoning, Hebei, and Shandong. Having gained the support of foreigners for helping crush the Boxer Rebellion, he successfully obtained numerous loans to expand his Beiyang Army into the most powerful army in China.Yuan also gained control of the railways, and railway construction became a major source of his revenue. 

The Empress Dowager and Guangxu died within a day of each other in 1908, and though the Emperor’s will specifically ordered Yuan be executed, he was allowed to retire to his hometown on the pretext of having a foot disease.

During his three years of effective exile, he managed to keep the loyalty of the Beiyang Army. Having this strategic military support, Yuan held the balance of power between various revolutionaries (like Sun Yat-sen) and the Qing Court. Both needed Yuan on their side.