China and Taiwan inked a landmark deal on Monday that will see water pumped from the Chinese mainland to a Taiwanese-controlled archipelago, in another sign of warming ties between the rivals.

The agreement will see water pumped from China's southeastern province of Fujian to the 100,000 residents of Taiwan's Kinmen County by 2017.

"The event is of historical significance when it comes to forging a path toward peaceful relations between the two sides," Kinmen county magistrate Chen Fu-hai said at the signing ceremony.

The heavily fortified Kinmen archipelago is just two kilometres from the mainland and was heavily shelled by Chinese forces in the late 1950s during a 44-day assault that killed 618 people.

"Now Kinmen plays a pivotal role in promoting peace across the (Taiwan) Strait. The killing field has been transformed into a bridge of peace," Chen said.

To complete the project, an underwater pipeline 11.5 kilometres (7.1 miles) in length will be built to connect Kinmen and Fujian.

Water is set to begin pumping through the channel in two years and will be able to deliver up to 34,000 tonnes of water per day by 2027.

Kinmen is currently home to just one water company that relies on a desalination facility, underground aquifers and a tiny dam.

The company is able to process up to 19,000 tonnes of water daily, which is 15,000 tonnes short of demand.

Taiwan split from China in 1949 after a civil war and is self-ruling, but Beijing still sees the island as part of its territory awaiting reunification -- by force if necessary.

However tensions between the two sides have eased since Taiwanese President Ma Ying-jeou came to power in 2008, pledging to boost trade links and allow more mainland tourists to visit.

As a result, hundreds of thousands of Chinese tourists have visited Kinmen each year, which has added to the island's already stressed water supplies.