The directive reverses a 1993 ban put in place by Beijing on the international trade in tiger bones and rhino horns, both valued for their purported healing powers in Chinese traditional medicine.
In a statement Monday, China's State Council said rhino and tiger parts could now be used "in medical research and healing," as long as they came from farmed animals.
"Powdered forms of rhino horn and bones from dead tigers can only be used in qualified hospitals by qualified doctors recognized by the State Administration of Traditional Chinese Medicine," the statement said.
In 2010 the World Federation of Chinese Medicine Societies issued a statement saying there was no evidence for the claimed medical benefits of tiger bone. No proof of medical benefits from rhino horn has been found either.
Despite this, there is a still a lucrative trade in the body parts in China, where thousands of captive tigers are bred for ineffective traditional cures.
Iris Ho, senior specialist for Wildlife Program and Policy at Humane Society International, said in a statement the announcement by Beijing was a "death warrant" for rhinos and tigers in the wild.
"This is a devastating blow to our ongoing work to save species from cruel exploitation and extinction, and we implore the Chinese government to reconsider," Ho said.
The World Wildlife Fund (WWF) called on Beijing to urgently reinstate the ban, saying in a statement it was "critical" to saving the species.
"It is deeply concerning that China has reversed its 25 year old tiger bone and rhino horn ban, allowing a trade that will have devastating consequences globally", said Margaret Kinnaird, WWF Wildlife Practice Leader.
The decision by the Chinese government comes less than a year after it officially banned the trade of ivory, a move which conservationists hoped would help save increasingly endangered elephants.
In its statement the State Council said any illegal trade of rhino and tiger products would be subject to "severe crackdowns" and illegal products would be confiscated.
But Kinnaird said the new law could lead to illegal products being sold under the cover of legality, as well as increased demand from consumers.
"With wild tiger and rhino populations at such low levels and facing numerous threats, legalized trade in their parts is simply too great a gamble for China to take," she said.
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