The new state-owned Hebei Iron and Steel Group Co replaces Baosteel Group Co as China's biggest steel company.
China is the world's biggest steel produce and consumer but many of its mills are dirty and inefficient.
The government is trying to promote efficiency through consolidation and hopes bigger producers can strike better deals with foreign iron ore suppliers at a time of record prices.
The new company was formed through a merger of Tangshan Iron & Steel Group and Handan Iron & Steel Group.
"The new group is officially set up today," said Wang Yanjun, a Tangsteel spokesman. He said it would be based in the northern city of Shijiazhuang in Hebei province, which encircles Beijing.
Tangsteel's steel output last year was 22.75 million tonnes, while that of Hansteel was 9 million, according to the Chinese financial press.
Their combined total would rank fifth worldwide after South Korea's Posco, which produced 32.8 million tonnes. Baosteel's 2007 output was 28.6 million tonnes.
China's steel boom has been driven by explosive growth in demand from export-driven manufacturing industries, a surge in Chinese auto ownership and a domestic building boom in dozens of cities.
China has a half-dozen competitors among the world's top 20 steel producers, according to Metal Bulletin, an industry consultant. The world's biggest steel producer is Luxembourg-based ArcelorMittal SA, with output of 116.4 million tonnes last year.
