In his first film in a Western setting, Taiwanese writer and director Hou Hsiao Hsien presents a Parisian drama loosely inspired by Albert Lamorisse's classic 1956 short film The Red Balloon. In the opening sequence, seven-year-old Simon (Simon Iteanu) spots a red balloon floating above him at a subway entrance. He playfully beckons that the orb follow him but it has a mind of its own and wants to glide above the city for a while.

Simon's mother Suzanne (Juliette Binoche) is a puppeteer whose vocal talents are used in the shows she writes. This creative woman loves her work but is having a hard time with her chaotic personal life. She has just hired Song (Song Fang), a Taiwanese film student, to be Simon's nanny. The boy is easy to manage since he loves to play pinball and putter around the apartment. Song, who is working on a new film project, decides to shoot him carrying a red balloon around Paris. She tells him about the short film made in 1956. Simon goes to a museum with his class and looks at a painting of a small boy and a red balloon.

Hsien playfully deals with this image throughout the film as it soars above the city or stops near a train, peeks in a window, or bounces in the breeze. The only one in the story who is not playful is Suzanne. She is having financial squabbles with her ex-husband and is in the middle of a fight with her tenant who hasn't paid his rent. The carefree life that Simon knows as a child has eluded her and millions of other Parisians whose hearts are not lifted by the red balloon, a symbol of beauty and joy.