Xinhua state news agency said that as of Sunday afternoon the film had earned 1.317bn yuan ($212m, £137m) since it opened on 16 July.
The previous record was held by 2012 road trip comedy Lost in Thailand which earned about 1.27bn yuan.
Monster Hunt, a blend of live-action and animation, tells the story of a radish-like baby monster called Huba.
The surreal comedy is set in a fantasy world resembling ancient China, where monsters and humans co-exist uneasily in two separate lands.
When revolutionaries in the monsters' world attempt to overthrow their royalty, the monster queen flees to the land of humans and impregnates a hapless human man, Tianyin, with Huba.
He ends up being pursued by both monsters and monster-hating humans keen on capturing the newborn Huba.
Why China has fallen for a baby radish monster
The movie was directed by Raman Hui, who co-directed 2007 Hollywood animated film Shrek the Third.
In its review, Screen Daily praised the animator for creating "a menagerie of eccentric and intriguing characters to rival the best fantasy adventures".
However, it  added, Monster Hunt's "uneven tone and wayward plotting" could restrict its audience overseas.
The Hollywood Reporter agreed, noting that, outside China, the family-friendly film faces stiff competition from the likes of Minions and Inside Out. "But given Monster Hunt's novel setting and sprinkling of kung fu antics" international success is "not completely" out of the question.
The highest grossing film ever in China is Hollywood car racing movie Furious 7, which earned about 2bn yuan after it opened in April.

The 22-year-old, who was a former England youth international, started his career at Everton before joining Burnley in 2015.
Long had loan spells at both Fleetwood Town and Bolton Wanderers in League One last season.
"He is a quality striker and possesses real pace which frightens defenders," said Town manager Justin Edinburgh.
"I think all we will be adding now is another goalkeeper, which should complete a strong summer of recruitment for us. We are happy with the balance of the squad."
Find all the latest football transfers on our dedicated page.
Fantasy comedy Monster Hunt has become the highest-grossing domestic film in China, state media said.
[NEXT_CONCEPT]
League One club Northampton Town have signed Burnley striker Chris Long on a season-long loan deal.