The $240m circuit will hold 200,000 spectators and is due to be completed in March 2004.
The deal is a victory for China, which has been trying to join the European-dominated Formula One for more than a decade.
Currently, 11 of the 17 races are held in Europe.
Formula One bosses are hoping the Chinese Grand Prix will bring more fans to the sport - which depends heavily on advertising - by tapping into the country's 1.3 billion population.
"We've had many, many offers for us to hold Formula One racing in different parts of China and I'm very, very pleased that we decided to wait for Shanghai," Ecclestone said at a ceremony in Shanghai.
"We hope that coming to China will bring enthusiasm for motorsport."
China spent more than nine years developing a circuit in the southern city of Zhuhai and was scheduled to join the F1 calendar in 1998, but the track failed to meet international standards.
The China Grand Prix is the latest addition to the F1 circuit, following Malaysia's debut in 1999.
Engine smoke
Meanwhile Moscow's mayor has blamed Bernie Ecclestone's excessive demands for the city's failure to secure a Grand Prix already.
Russia had been widely tipped to join the Formula One calendar in 2004 but Moscow's negotiations stalled.
That has left the Moscow project - which was assisted by Arrows owner Tom Walkinshaw's TWR Group - in limbo.
Moscow mayor Yuri Luzhkov told Russian news agency RIA: "He wanted to keep all the rights for the event - ticketing, television, advertising - which would leave us with only engine smoke. That's why the negotiations failed.
"We have many people, and especially young people, who would like to see Formula One with their own eyes."