The Cold Eddy to the Northeast of Diaoyu Island (CEND) was examined in detail using the Regional Ocean Model System (ROMS). Model results indicated the presence of a cyclonic semi-closed circular current in the upper 30 m of the East China Sea. This current is present from May to November, and extends over the area between 26.2 ${}^{\circ }$N–27.5 ${}^{\circ }$N and 122.5 ${}^{\circ }$E–124 ${}^{\circ }$E with a center at 26.8 ${}^{\circ }$N, 123.5${}^{\circ }$E. Simulations showed that this eddy reinforces the exchange between the shelf water and the Kuroshio. When the CEND is the strongest (August), although the total intrusion onto the inner continental shelf is minimal (0.12 Sv), flow off the continental shelf is three times that of total intrusion. Results from particle tracking experiments indicated that the bottom cold water of CEND originates from the subsurface Kuroshio off the northeast of Taiwan. On the basis of bottom topography experiments and analysis of the Joint Effect of Baroclinicity and Relief (JEBAR) term, we conclude that baroclinicity changes in April cause the subsurface Kuroshio water to intrude over the northeast of Diaoyu Island where it encounters topography that deepens sharply. This local topography causes the intruded water to be subjected to positive vortex-tube stretching, giving rise to a cyclonic semi-closed circular current and upwelling, forming the CEND. Similarly, baroclinicity changes in September weaken intrusion of subsurface Kuroshio water to the northeast of Diaoyu Island, thereby the supply of bottom water decrease and causing the CEND to disappear. The sharply deepening topography to the northeast of Diaoyu Island is a necessary condition for the formation of the CEND, and the seasonal variation of CEND is driven by variations in baroclinity.