Chilean Foreign Minister Ignacio Walker and his Chinese counterpart Li Zhaoxing signed the pact during a ceremony on the sidelines of the Asia Pacific Economic Cooperation forum in Busan, South Korea. Chinese President Hu Jintao and Chilean President Ricardo Lagos witnessed the signing.
No details of the agreement were immediately released, but it was quickly welcomed by business leaders.
"The free trade agreement is a historic step for free trade important for China, important for Chile, important for Latin America," Mauro Mazzacurati, the president of delivery company DHL's operation in Chile, told The Associated Press.
Earlier Friday, Lagos defended bilateral free-trade agreements in a speech to a business executives' meeting at the APEC forum, which aims to achieve free trade among its 21 member economies by 2020.
Lagos said the ultimate goal remains a strong multilateral trading system based on the World Trade Organization, which is due to hold a meeting next month in Hong Kong that will try to break a deadlock in global trade talks.
"The fact that we have so many trade agreements doesn't mean that Chile, as any other country, is not so much involved in what is going to happen next month in Hong Kong," Lagos said.
Hopes of advancing the WTO's trade liberalization goals at the Hong Kong meeting have soured because of disputes over agriculture and other issues, which recent talks in Europe have failed to resolve.
"It is essential that the leaders be able to put all of our political will and to instruct the negotiators that it is necessary to succeed," said Lagos. "If we succeed, then at the world level I'm sure we'll be much closer to reaching an agreement next month in Hong Kong", reported AP.