The new entity, to be called the China Railway Corp., supervised by the Ministry of Transport, will be wholly state-owned and will perform the business functions of the Ministry of Railways, which is to be dismantled under the government's restructuring effort.
The Xinhua News Agency said a date for the establishment of new corporation was not disclosed.
The report said the railways ministry's assets, liabilities and personnel will be transferred to the new corporation.
The railway ministry's debt-to-asset ratio had climbed to 61.81 percent at the end of September last year.
The report said the ministry's huge debts were the result of the country's railway construction boom in recent years.
Many of China's public works projects have been mired in corruption and the country's top leadership has been cracking down on the problem.
China's high-speed rail system, highly praised around the world, has not come cheap. Some past reports have estimated the cost was running into the hundreds of billions of dollars.
China says 98,000 kilometers (60,894 miles) of rail lines, including 9,356 kilometers (5,813 miles) of high-speed rail lines, were in operation at the end of last year.