"The opening of the Republic of Panama's embassy in the People's Republic of China was done in accordance with the principles that frame the diplomatic relations between both countries," the foreign ministry said in a statement.
The announcement was made as a delegation of Chinese business chiefs was on a visit to Panama to explore investment opportunities.
Panamanian President Juan Carlos Varela on June 12 declared his country had opened diplomatic relations with China. That automatically meant the rupture of such ties with Taiwan, which China regards as a renegade province.
Previously, Panama maintained trade relations with China. But with the upgrade in ties, it now hopes to become a key point for China's interests in Central America.
China is already the second-biggest user of the Panama Canal, after the United States.
It is currently Panama's fourth-biggest trading partner and a major supplier to its Colon free trade zone.
Panama imports $1.2 billion worth of goods from China each year, and sends $50 million worth of exports to the Asian giant.
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