While the United States technically does not recognize Taiwanese sovereignty from China, Washington does have a special relationship with the island and laws in place that require the United States to protect Taiwan from Chinese aggression.
Beijing insists that only it has the right to represent China in worldwide society.
In a statement made after the decision, the Dominican Republic said it "recognises that there is only one China in the world, and Taiwan is an inalienable part of the Chinese territory".
Beijing announced on Tuesday morning that it would exchange ambassadors with the Dominican Republic "as soon as practicable".
Establishing diplomatic ties with China brings the Dominican Republic great opportunities and will benefit the people of DR, the state-run Xinhua quoted Wang as saying.
The Caribbean nation switched allegiance to China after being offered the money in investments, financial assistance and low-interest loans, Taiwan claimed. She has declined to endorse the so-called 1992 Consensus that Taiwan and the mainland are part of "one China", allowing each side its own interpretation of what that means.
In a hastily arranged ceremony, Chinese Foreign Minister Wang Yi and his counterpart from the Caribbean country signed an agreement after the Dominican Republic moved to formally cut ties with the government in Tapei.
Wu insisted that there were no immediate signs of a crisis, dismissing fears about relations with Haiti and the Vatican, which have shown signs of moving closer to Beijing.
The news on the Dominican Republic switch, announced in both Beijing and Santo Domingo, drew strong and swift condemnation from Taiwan Foreign Minister Joseph Wu.
China has been increasing pressure on Taiwan since the election of President Tsai Ing-wen, a pro-independence candidate from the Democratic Progressive Party. "Its actions had damaged cross-strait relations and eroded trust", said Wu. The investment includes $400 million for a freeway and $300 million for a new gas-fired power plant.
Only 19 nations have official ties with Taiwan today, including the Vatican.
Chinese analysts say Beijing will likely continue to use its economic and political clout to lure away other Taiwanese allies until Tsai accedes to China's demands.
In recent months, Beijing has flexed its military muscle in the region by sending strategic bombers to circumnavigate Taiwan, and held a live-fire drill in the Taiwan Strait last month.
China and Taiwan split during a civil war in 1949.
"We've always known things were not looking rosy here", the official said. "We highly appreciate this".
Flavio Dario Espinal, the legal consultant to the Dominican presidential office, told a news conference on Monday that the change in foreign policy was based on the nation's "needs, potential and future prospects".
"We are deeply grateful for the co-operation we've shared for years", he said. Taipei has struggled to compete with an increasingly powerful China.
"Developing nations should be aware of the danger of falling into a debt trap when engaging with China", he said.