Djibouti's position on the northwestern edge of the Indian Ocean has fueled worry in India that it would become another of China's "string of pearls" military alliances and assets ringing India, including Bangladesh, Myanmar and Sri Lanka.
China began construction of a logistics base in Djibouti last year. It will be used to resupply navy ships taking part in peacekeeping and humanitarian missions off the coasts of Yemen and Somalia, in particular, Reuters reported.
It is China's first overseas naval base, though Beijing officially describes it as a logistics facility.
State radio said more than 300 people attended the ceremony, including deputy Chinese naval commander Tian Zhong and Djibouti's defense minister.
The base will enable China to better support its patrols in waters off Somalia and Yemen and carried out its international humanitarian obligations, the report said.
Chinese President Xi Jinping is overseeing an ambitious military modernization program, including developing capabilities for China's forces to operate far from home.
Djibouti, which is about the size of Wales, is at the southern entrance to the Red Sea on the route to the Suez Canal. The tiny, barren nation sandwiched between Ethiopia, Eritrea and Somalia also hosts US, Japanese and French bases.
Ships carrying personnel for the Djibouti base left China last month.
There has been persistent speculation in diplomatic circles that China would build other such bases, in Pakistan for example, but the government has dismissed this.