Pope Benedict XVI is to write a letter to China's 10 million Catholics and attempt to restore full diplomatic relations with Beijing.
The Pope did not attend the Vatican strategy meeting himself
The moves were announced after a two-day meeting at the Vatican to review Church strategy towards China.
Ties have been severed since the 1950s. China's state Church has about four million followers with millions more in organisations loyal to the Vatican.
China has ordained a number of bishops without the Pope's consent.
It is also unhappy that the Vatican has diplomatic relations with Taiwan.
In a statement, the Vatican expressed a willingness to pursue dialogue with the Chinese authorities to overcome what it called the incomprehension of the past.
China's Catholics are split between state Church and underground
The BBC's David Willey in Rome says a compromise might be reached on closing down the papal embassy in Taipei, but that it is difficult to foresee the Vatican backing down on its demand for a final say in all Episcopal appointments.
The Chinese authorities take the view that the Vatican is interfering in Chinese internal affairs when it demands the right to appoint bishops in China.
At least three were appointed without Vatican approval last year.
Our correspondent says there is speculation in the Vatican that both sides are ready to move towards a new relationship, given that they would welcome the possibility of a papal visit around the time of the 2008 Olympics in Beijing.
The Vatican statement did not say what would be in the Pope's letter to his Chinese flock or when it would be written.
It also paid tribute to the Catholics in China who had "without yielding to compromise... kept their loyalty to the Seat of St Peter, at times even at the price of great suffering".
The Rome meeting was attended by leading Chinese Catholics, including outspoken advocate of religious freedom, Cardinal Joseph Zen of Hong Kong.
The Pope himself did not attend the talks.