The Shaheen-II exercise will be conducted by the PAF and People's Liberation Army Air Force during September 3-22. The PAF's Mirage and F-7PG aircraft are taking part in the wargame.
"It is a historic event as it is the first time that the air force of any country would be participating in a joint air exercise in Chinese airspace," a statement said.
The exercise will focus on air combat and use of air power in any future conflict.
The PAF conducts exercises in the country and abroad at regular intervals. It has been participating in several international exercises with the air forces of the US, Italy Turkey and other allied countries.
These exercises help hone the combat skills of PAF crew and enable them to learn the latest air power strategies in complex theatres of warfare, the statement said.
The first exercise of the Shaheen series was held at an airbase in Pakistan in March 2011.