Wildlife conservationists fear this new policy could have "devastating consequences" globally.
The trade of rhinos, tigers, and their related products will be allowed under "special" circumstances, the State Council, or cabinet, said in a statement.
Those include scientific research, sales of cultural relics, and "medical research or in healing."
The newly sanctioned areas of trade will be highly regulated.
Only doctors at hospitals recognised by the State Administration of Traditional Chinese Medicine will be allowed to use powdered forms of rhino horn and tiger bones.
Tourism and cultural heritage authorities will also have to sign off on any rhino and tiger products that are used for "temporary cultural exchange."
Trade volume will be "strictly controlled," the State Council said, with any trade outside of authorised use cases to remain banned.
China prohibited the trade of rhino horn and tiger bones in 1993 but a black market has flourished, with many products entering the country through Vietnam, according to an investigation conducted last year by the Elephant Action League conservation group.
Wildlife conservationists worry that allowing a limited trade of rhino and tiger goods will spur overall demand for related products, while efforts to crack down on wildlife contraband will be hindered.
"Not only could this lead to the risk of legal trade providing cover to illegal trade, this policy will also stimulate demand that had otherwise declined since the ban was put in place," Margaret Kinnaird, the World Wildlife Fund's wildlife practice leader, said in a statement.
China has made efforts to crack down on the sale of illegal wildlife products such as ivory in recent years.
The country's ban on ivory sales went into effect in December 2017 -- an attempt to rein in what used to be the product's largest market in the world.
A partial ban on ivory had already resulted in an 80 percent decline in ivory seizures entering China and a 65 percent drop in domestic prices for raw ivory, according to a report last year by state media Xinhua.
Ivory is seen as a status symbol in China. Other illegal wildlife products, such as pangolin scales, continue to see demand for their supposed medicinal properties.