By Agence France-Presse
The agreement follows "a gradual and reciprocal rapprochement (and) has been agreed following a long process of careful negotiation and foresees the possibility of periodic reviews of its application," the Vatican said in a statement issued as Pope Francis visits the Baltic states.
"It concerns the nomination of Bishops, a question of great importance for the life of the Church, and creates the conditions for greater collaboration at the bilateral level," it added.
Vatican spokesman Greg Burke played down any suggestion that the accord could have wider political implications, even though it marks a breakthrough on an issue which has bedevilled relations with China for years.
The agreement "is not political but pastoral, allowing the faithful to have bishops who are in communion with Rome but at the same time recognised by Chinese authorities," he said in Vilnius.
The announcement had been expected amid speculation that it could lead to a normalisation of ties between the Vatican and Beijing, possibly at the expense of Taiwan.
The Vatican is one of only 17 countries around the world that recognises Taipei instead of Beijing but Pope Francis has sought to improve ties with China since he took office in 2013.
Hong Kong's Catholic press reported earlier this month that a new round of Sino-Vatican negotiations was expected to be held in September and a deal could be signed in October.
There are an estimated 12 million Catholics in China, divided between a government-run association whose clergy are chosen by the Communist Party, and an unofficial church which swears allegiance to the Vatican.
The Vatican has not had diplomatic relations with Beijing since 1951, two years after the founding of the communist People's Republic.
Previous attempts to restore ties have floundered over Beijing's insistence that the Vatican must give up recognition of its rival Taiwan and promise not to interfere in religious issues in China.