As she signed the pact into law, Michelle Bachelet, the Chilean president, said: "We are convinced that a treaty of this nature will be to the benefit of most Chileans."
Bilateral trade has boomed as China's appetite for raw materials to feed rapid industrialisation has turned to Chile.
Chile is home to the world's biggest copper mine and China is the world's leading consumer of copper.
The treaty will free 92% of Chile's exports to China from customs tariffs and lift Chilean tariffs on 50% of China's exports. Some Chilean exports will remain subject to ongoing levies for between five and 10 years. It takes effect in 60 days.
Bachelet called the deal "a milestone" in Chile's trade expansion which will create new links in "a privileged and strategic way, with a country that already is the fourth largest economy in the world".
Growth in bilateral trade has soared to $7.138billion, with Chilean exports at $4.596billion and Chinese exports at $2.542billion in 2005.
That was up from some 5.3billion dollars in 2004 and 3.5billion in 2003. Chilean copper exports account for roughly half of overall trade.
In the past three years, copper has tripled in price, to $3 a pound from $0.80.
The trade deal further strengthens close ties between the trade partners.
In February Chile's state-owned Corporacion Nacional del Cobre de Chile (CODELCO), the world's largest copper company, and China's Minmetals Corporation signed a $550million joint venture deal in which CODELCO will supply China with copper for the next 15 years.
Alejandro Foxley, the foreign minister, underscored the pact's significance for Chile.
He said: "The deal has special importance for Chile, in that it constitutes the country's decisive step to fix its positioning in the Asia-Pacific region."
The pact with China follows similar treaties the Andean nation has entered with the United States, Canada, the European Union, South Korea and other Latin American countries.
Chile is negotiating with Japan for a free-trade pact and with India for a preferential trade deal. On Tuesday, Chile is to seal a trade agreement with Peru similar to those recently reached with Ecuador and Panama.