Sichuan Airlines, majority-owned by the Sichuan provincial government, will fly directly from Chengdu three times a week and establish its Australian headquarters in Melbourne.
Announcing the deal during a trade mission to China, Victorian Premier Ted Baillieu said it was a significant step in positioning the state as Australia's gateway to China.
"Direct air services between Melbourne and Chengdu will increase business, education and tourism ties between Victoria and China," he said.
Chengdu is one of the largest cities in western China, with a population of 14.7 million, and has presented itself as a key driver of China's economic growth in recent decades.
China Eastern, China Southern and Air China all fly directly from China to Melbourne.