"The Government of the Republic of Panama severs "diplomatic relations" with Taiwan as of this day and undertakes not to have any more official relations or official exchanges with Taiwan", it continued.
African nations São Tomé and Príncipe and Gambia announced they would sever relations with Taiwan past year.
Taiwan's President Tsai Ing-wen attended a ceremony to mark the opening of the expanded Panama Canal previous year in an effort to shore up ties with its Latin American ally. The next two decades saw most major states switching diplomatic recognition from Taiwan to China, with Japan doing so in 1972 and the United States in 1979.
Chinese Foreign Minister Wang Yi and his Panamanian counterpart Isabel Saint Malo de Alvarado signed the communique in Beijing. Such complementary strengths herald a bright future of fruitful cooperation.
De Saint Malo said she hoped the new relationship would lead to trade, investment and tourism opportunities, in particular "exporting more goods from Panama to China".
Panama had previously recognized Taiwan, an island nation populated mainly by Chinese Kumomingtang who lost the Chinese civil war in 1949.
Taiwan, considered a rebel province by Beijing, is recognised by around 20 countries worldwide and the issue of its status has risen again with the election of US President Donald Trump.
Panama gave no specific reason for the split but China has been investing in the country, which is home to Panama canal - a crucial shipping route.
Another political scientist said it was "not surprising" that Panama established ties with China.
"Now this trend could continue for a while", Tang said.
In a statement, the Panamanian government said, it is breaking its diplomatic ties with Taiwan, and pledges to end all relations or official contact with Taiwan.
Taiwan's Presidential Office's comment on the incident is still yet to come.
Panama is one of Taiwan's oldest friends, but some diplomats in Beijing had speculated that the Central American country could become the next nation to break ties.
Taiwan's government expressed its anger over the move on Tuesday, saying it was "sorry" for the decision and that it would not compete with China in what it described as a "diplomatic money game".
Panama is the latest among the handful of countries that had maintained ties with Taipei instead of Beijing to switch sides.
A woman walk pass next to Panama flags a day before the inauguration of the Panama Canal Expansion project, in Panama City, Panama June 25, 2016.