The operation began in late May after police questioned four women on a train, each holding a baby in her arms, the official Xinhua News Agency said, citing officers with the Nanjing railway police office.
One woman confessed that they had bought the babies in southwest China's Yunnan province and planned to sell them to a person in eastern China's Shandong province.
Authorities arrested 10 suspects in the two provinces and learned that the gang had already sold 27 newborns, Xinhua reported. The gang bought the babies in Yunnan, took them to Shandong and sold them with the help of human traders.
The report did not give any details of the other arrests.
More than 60 babies had been trafficked, and authorities had rescued 40, Xinhua said. Police continued to search for the others.
China has a thriving trade in babies that are stolen or bought from poor families and then sold to couples who want another child, a servant or a future bride for a son.
Thousands of babies are also abandoned every year in China. Many are girls given up by couples who, bound by rules that limit most urban families to one child, want to try to have a son. Others are left at orphanages or by the roadside by unmarried mothers or poor families.