Chinese Commerce Minister Gao Hucheng and Swiss Economy Minister Johann Schneider-Ammann inked the accord in a ceremony at the Commerce Ministry in Beijing before officials and reporters.
Afterwards, they clinked glasses of champagne in celebration of the agreement, which aims to increase the $26.3 billion in bilateral trade they recorded in 2012.
China in April signed its first FTA with a European country -- non-EU member Iceland -- but Saturday's deal marks the first with an economy in mainland Europe.
Switzerland ranked as the world's 19th-largest economy in 2012, according to the World Bank.
China is the world's second-biggest.
"This free trade agreement has an important significance for the relationship between the two countries," Schneider-Ammann told AFP after Saturday's signing ceremony.
He noted that China is the world's single biggest developing market with potential for a growing middle-class.
Fiercely independent Switzerland is not a member of the EU and even waited decades to join the United Nations.
Nonetheless, it is an economic heavyweight known for high-value luxury goods such as its world famous watches and as a financial centre.
Switzerland mainly sells watches, pharmaceuticals and chemicals, as well as machinery to China, which ships mostly textiles and machinery back to Switzerland.
Unlike most western countries, Switzerland enjoys a huge trade surplus with China to the tune of $22.8 billion last year.
Switzerland and China had signed a preliminary FTA agreement in May during a visit to the landlocked European nation by Chinese Premier Li Keqiang.
Schneider-Ammann said the deal is also important for hedging risks.
"We get a chance to spread out the risk of the Swiss economy a little bit over the borders of our European neighbourhood," he said.
"It has a great importance."
The EU economy has experienced serious turmoil over the past several years in the wake of the global financial crisis and due to sovereign debt instability that engulfed Greece and other member states including Spain,Italy and Portugal.
The 28-member bloc and China have jousted over mutual claims of unfair trade practices in sectors including Chinese solar panels and European wine, leading to worries that the dispute could spiral out of control.
A visit to Beijing last month by the EU's trade chief, who held talks with Gao, helped damp down tensions and increased optimism the two sides can come to terms on their differences.
Schneider-Ammann said doing so was vital for smaller countries like his own.
"It's absolutely important that the bigger economies find ways to keep open their markets because (the) more open the global market... the better the chances to do business," he said.
The deal still needs approval by the Swiss parliament before it can take effect.