Citizens say they welcome the development, but there are concerns families will be reluctant to have a second child due to the high costs.
It is a major overhaul as China attempts to resolve its rapidly falling birthrate.
The Xi Jingping-led government has abandoned its 35-year-old policy of one child per family.
Couples will now be allowed to have two children.
The Communist Party first introduced the policy in 1979 to curb the growing population and limit demand for water and other resources.
But scholars suggest the system has become outdated and responsible for shrinking China's labour pool.
Dr Jieyu Liu, from the University of London's School of African and Asian Studies, says those concerns led to pressure for the change.
"One is the ageing issue. This is a response to the ageing population in China. Another issue is the economic concern, because, in the past three decades, China's economic growth was mainly led by exports, which are largely dependent upon abandoned and surplus cheap labour, and the decline of the working labour force has been considered as impacting the economic development in China."
In the last two years, the policy had been slightly eased to address those issues.
But residents on the streets of Beijing say scrapping it entirely was the only way forward for the country.
"If the family financial situation allows it, I think it is a very good decision to have a second child. This policy helps resolve the ageing society problem and will provide more of a labour force for China. To me, I think it is just a perfect life to have two or three children in the family." ... "I think this policy is really good. I was born in the 1980s, and I'm the only child in my family, and I often felt so lonely. I think it is a lot better to have someone grow up with you. And when the parents get old, he or she can share the financial burden with you. Two children in a family is the best. You don't grow up alone."
Chinese affairs expert and journalist Jonathan Fenby has told the ABC he believes the government is mostly trying to gain the support of China's younger demographic.
"I think it's more an attempt to show that the regime cares more for people, it's an attempt to establish a better relationship between the Communist Party and particularly the younger, urban middle class, who are the people who the Communist Party needs to keep the allegiance and the loyalty of, and there are signs that that relationship's been fraying. So I think this is more of a social issue than anything with short-term economic consequences."
Chinese officials estimate the policy has prevented 400 million births since it was implemented.
Couples who had a second child faced possible fines, loss of employment and, in some cases, forced abortions.
As a result, cities like Shanghai now have some of the lowest birthrates in the world, at 1.7 children per family.
The rate is considered so low that it may never recover, but Dr Liu says there were positives to the policy, too.
"There is some unexpected consequence of the one-child policy, which is the treatment towards girls in urban China, because the families are only allowed to have one child, so, regardless of the sex, the parents always invested whatever they had into the girl's education. So a lot of research found that there is no difference, in terms of educational achievements, between the single-boy family and the single-girl family."
Dr Liu says the overhaul will not resolve population concerns, due to the high costs of raising a child in China.
She suggests the government must help ease the financial strain on young couples to ensure they keep the population from falling further.
"The Chinese government has become the victim of its success. Unless the government starts to share the burden of childbirth, I don't think the young couples in urban China will, very voluntarily, accept the two-child policy."
