Domanski-Lyfors will receive a salary of about 3.7 million kronor ($530,000), according to newspaper Beijing News.
The Women’s World Cup starts in six months and the Swedish coach will be under huge pressure after Chinese sport officials set the squad a minimum target of a semi-final finish.
Domanski-Lyfors, described in the Chinese press as “tougher than any male coach,” led Sweden to the 2003 World Cup final, which they lost to Germany.
She stepped down in 2005 after nine years but stayed on with the Swedish Football Federation as coach for the under-21 side.
She was reported to be the only candidate for the post of the currently troubled “steel roses”, as China’s women’s team is known.
The side has been on a downward spiral for months and last week lost its caretaker coach who stepped down just two months after the head coach abandoned the squad citing ill health.
China have slipped to ninth place in the women’s football standings in the years since they lost to the United States in the final of the 1999 World Cup in a penalty shoot-out.