Economic woes mean Taipei must free up investment
Under the new policy, local businesses can directly invest in China instead of via a third country.
The new policy of "aggressive opening and pragmatic controls" includes the scrapping of a $50m ceiling on individual investments in China and the simplification of investment procedures on smaller projects.
But projects deemed by the Taiwanese authorities to threaten national security will still be banned.
Taiwan banned direct trade and transport links with China at the end of the Chinese civil war in 1949.
WTO entry
The new, vigorous approach replaces the 5-year-old policy of "no haste, be patient" introduced by former President Lee Teng-hui predecessor during tensions with the mainland in 1996.
The investment limits were imposed to try to ensure investment went into building up Taiwan's own economic base.
The move comes ahead of a meeting starting in Qatar on Friday at which both countries are expected to gain permission to join the World Trade Organisation (WTO).
China's entry into the WTO will bring wide-ranging market access agreements with all the WTO's 142 other members.
Economic slowdown
Correspondents say critics are worried that Taiwan could become too dependent on China for trade, but supporters of the policy are anxious for a larger piece of the Chinese market at a time when Taiwan's economy is behaving poorly.
The ongoing global slowdown has hit Taiwan hard, with unemployment hitting record highs and hi-tech exports slumping.
Analysts say the changes could boost President Chen's Democratic Progressive Party (DPP) among moderate voters ahead of the parliamentary elections on 1 December.