The unmanned spacecraft was launched by a Long March 3C rocket from the Xichang Satellite Launch Center in Sichuan, western China, state media said.
It is China's first lunar module capable of returning to Earth and the mission's main technical challenge will be making sure the spacecraft slows down enough to re-enter Earth's atmosphere safely.
Too fast and it could overheat or become difficult to track and control, Hu Hao, chief designer of the lunar exploration program, told The China Daily.
It is expected to take around a week to fly around the moon. The spacecraft will end its mission by landing on the grasslands of Inner Mongolia.
The mission tests technology that will be used in a more ambitious launch, scheduled to take place in 2017, when an unmanned lunar probe will go to the moon, collect soil samples and return home.
Chinese astronauts have made five manned space flights on a series of Shenzhou "Divine Vessel" modules, with the latest mission in 2013 completing a successful manual docking with the Tiangong-1 space station.
Last December, China put a lunar rover -- known as the Jade Rabbit -- on the moon but it has been plagued by mechanical troubles, the China Daily said.
On course for the moon?
Joan Johnson-Freese, a professor at the U.S. Naval War College, said the lunar orbiter marks a step forward in the capabilities needed for a potential manned lunar program, which while under discussion hasn't been officially approved yet.
"It's significance is not only in demonstration of technical abilities, but in a continued political will to achieve its space goals over long periods of time — which is what China has that the U.S. currently lacks."
While the United States has pulled back its space program, other countries are trying to match or surpass China's accomplishments in what some observers have called an Asian space race.
In September, India became the first Asian country to send an orbiter around Mars.
China sent its first astronaut into space in 2003 and has made rapid advances in the intervening decade.
Despite this, its space program is still yet to achieve capabilities reached by the U.S. and then Soviet Union decades ago, says James A. Lewis, director and senior fellow at the Washington-based Center for Strategic and International Studies.
With little economic or military advantage, its value, he says, lies in how the space program shapes China's perception of itself -- a conspicuous display of national power and wealth that asserts China's return to confidence and authority.
"We could ask if China is following an outdated recipe for superpower status," he writes in a blog for the University of Nottingham in the UK.
"In terms of the global effect of the manned program, there might be some truth to this. But for the domestic audience that is the chief concern of China's leaders, the space program produces invaluable results."