The manoeuvre involved 5000 soldiers and took place on Monday at an Inner Mongolian training centre which was opened to foreign observers for the first time, the Liberation Army Daily reported on Tuesday.
The 27 observers, from countries such as the United States, France, Britain and Russia, watched a "fierce" six-hour manoeuvre involving infantry, armour, anti-chemical units and other Chinese military forces, the paper said.
It is the second time this month that China has flexed its growing military muscle in front of a select audience of foreigners.
In early August, China hosted a large-scale “anti-terrorism” drill, involving military units from Russia and four former Soviet Central Asian republics.
That drill was seen as China's attempt to counterbalance the growing US military presence in the strategically important and resource-rich Central Asia region.
According to the Xinhua news agency, many of the observers were pleased with this week's opportunity to peep into Chinese battlefield tactics.
Steven Krstic, a British observer, was quoted by the agency as saying it was the first time he had seen so much Chinese military equipment and so many different kinds of Chinese armaments.
China's secrecy-obsessed military has been criticized in the past for not allowing foreign military observers to see anything of real value.
China has repeatedly voiced concern about instability on the Korean peninsula and has been engaged in months of painstaking diplomacy to bring all the parties together.
The rare show of candour came just two days ahead of the start of talks on Wednesday in Beijing, aimed at finding a way out of the festering Korean nuclear crisis.
The meeting follows talks in April involving North Korea, the United States and China, and this time will also include South Korea, Japan and Russia.
China has repeatedly voiced concern about instability on the Korean peninsula, and has been engaged in months of painstaking diplomacy to bring all the parties together.