China is to build a railway line between Nigeria's two main commercial cities, Lagos and Kano.
Nigeria's railways have fallen into disrepair
An $8bn contract was signed by the deputy transport minister and the president of the Chinese firm (CCECC).
CCECC President Lin Rongxin said 50,000 Nigerians would work on the 1,315km line which he said was "a design, construct and maintain project".
Nigeria's leader said the five-year north-south line was the first phase in a 20-year modernisation programme.
President Olusegun Obasanjo, who watched the signing, said the second phase of the railway project would include a link between the southern oil city of Port Harcourt and the central city of Jos.
The existing railway along these routes has fallen into disrepair and new tracks are to be built under the deal with China.
China recently granted Nigeria a loan of $2.5bn and much of this is expected to be used in the railway project.
Earlier this year Nigeria repaid a multi-billion dollar debt it owed to the Paris Club, becoming the first African nation to settle with its official lenders.
Nigeria is one of the world's biggest oil exporters, but it is also one of the world's poorest countries, with the majority of the population living on less than $1 per day.