China and Iceland established diplomatic relations on December 8, 1971. In May of the following year, China established an embassy in Iceland and sent its first ambassador to Iceland. From 1983 onwards, the duties of the Chinese ambassador to Iceland were fulfilled by the Chinese ambassador to Denmark. The embassy in Iceland was retained and a chargé d'affaires ad interim was posted. In January 1995, Iceland established an embassy in China and sent its first permanent ambassador to Beijing. From December of that year, China resumed sending ambassadors to Iceland.

In recent years, the two countries maintained momentum of high-level exchanges. Chinese President Jiang Zemin visited Iceland in 2002. Premier Wen Jiabao visited Iceland in 2012. Icelandic President Ólafur Grímsson paid three visits to China in 2005, 2008, and 2010, while Icelandic Prime Minister Jóhanna Sigurðardóttir visited China in 2013. In May 2023, Chairman of the Standing Committee of the National People's Congress Zhao Leji held a video meeting with the Speaker of Icelandic Parliament Birgir Ármannsson.

Iceland is the first Western European country to recognize China's market economy status. China is Iceland's largest tradingpartner in Asia. In April 2013, China and Iceland signed a free trade agreement, which was the first free trade agreement signed between China and a European country. It officially came into effect on July 1, 2014. In 2024, the bilateral trade volume between China and Iceland was US$443 million. China mainly exports coke, clothing, textiles, footwear, ships, and other products to Iceland, while primarily importing fishery products from Iceland.

China and Iceland have close cooperation in geothermal energy and climate change.

By the end of 2024, 3 pairs of sister citieshave been established between China and Iceland.