The South's President Park Geun-Hye offered as a goodwill gesture to return the bodies during her visit to Beijing in June.
The defence ministry said it would send back the remains of 425 Chinese soldiers buried in a military-controlled cemetery in Paju just south of the border with North Korea.
"Work began today to excavate the remains under an agreement reached between the two countries in early December," a ministry spokesman told AFP.
The excavation will take several months, he said, adding South Korea would take charge of all preparations such as washing the remains and placing them in coffins.
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The defence ministry described the agreement as "a new milestone" for relations between the former Cold War enemies.
China fought alongside North Korea in the 1950-53 conflict. Casualty figures remain disputed but Western estimates commonly cite a figure of 400,000 Chinese deaths, while Chinese sources mention a toll of about 180,000.
More than 700 North Korean soldiers are also interred at the cemetery. But the North has ignored the South's offer to return the bodies despite sporadic talks on the issue.
While some graves are named, most are identified only by nationality.
The bodies of more than two dozen North Korean commandos killed in a daring but unsuccessful 1968 attack on the presidential palace in Seoul are also buried there.
Also there is the body of a North Korean agent responsible for the 1987 bombing of a South Korean airliner that killed 115 people.