The Dalai Lama, 75, has led a government-in-exile from the northern Indian city of Dharamsala, after he and his followers fled across the Himalayas following a failed uprising against Chinese rule in 1959.
"As early as the 1960s, I have repeatedly stressed that Tibetans need a leader, elected freely by the Tibetan people, to whom I can devolve power," he said. "Now, we have clearly reached the time to put this into effect."
His decision is in the best interest of the Tibetan people, he said.
But the move by the Dalai Lama is only a "political show," said Qiangba Puncog, chairman of the Chinese government's Standing Committee of Tibet Autonomous Regional People's Congress.
"Like in the past, it is merely another political show of the Dalai Lama who attempts to arouse the attention of the international community and mould public opinion," he said. "But that will not exert any impact on the stability of Tibet."
Qiangba also said the Tibetan "government-in-exile" is an illegal political organization unrecognized by any country. "Whatever moves they take, Dalai Lama's 'retirement' or electing a successor, they will be all illegal and will not be recognized," Qiangba said.
"No matter whether he retires or not, his political attempt will not change. His speech is to declare publicly that he will not give up his attempt to sabotage unity and split China using any methods," he said.
The Xinhua article said many other Tibetan legislators attending the annual National People's Congress session in Beijing "were unwilling to spare a minute to comment on Dalai Lama's remarks that tarnished Tibet's image," saying it was "unnecessary" to refute his words.
"Facts are very clear. If you go to Tibet and see for yourself, you will naturally understand the Dalai Lama is telling lies," one attendee said.
For more than half a century, the Dalai Lama's statements, world tours and meetings with political and social leaders have stirred Beijing into comments decrying his authority.
The Chinese government also puts forward statistics to show that its "autonomous province of Tibet" has prospered under Chinese rule and ensured its political and social stability. Government statistics show that Tibet's economy grew 12.3 percent in 2010 to $7.7 billion, nearly an 80 percent increase within the past five years.
Exactly what the Dalai Lama's decision to step down from politics means in practice is unclear. There already is an elected Tibetan government-in-exile with a prime minister. The Dalai Lama might not be pursuing administrative functions including signing laws and administering oaths.
Regardless of his political or administrative roles, the Dalai Lama likely will remain a powerful spiritual leader, something which the Chinese government will continue to monitor in an attempt to sideline him.
The Chinese blame the Dalai Lama, whom they call a separatist, for instigating civil unrest over the years, in particular in March 2008. Monks demanded the release of imprisoned fellow monks and many demanded more autonomy for Tibet. Street riots occurred with up to 400 killed, depending on which source is quoted.
Last March, in a move to reduce the Dalai Lama's spiritual influence, the Panchen Lama, Tibet's second highest ranking Tibetan monk and chosen by Beijing, was elevated to China's top advisory body.
"The 11th Panchen Lama, one of the two most senior living Buddhas in Tibetan Buddhism, is now a member of the National Committee of the Chinese People's Political Consultative Conference," Xinhua news agency said at the time.
However, the Panchen Lama -- loosely translated as "great scholar" -- is traditionally chosen by the Dalai Lama, whose own chosen one in 1995 was a 6-year-old boy, Gedhun Choekyi Nyima, living in Tibet.
But Nyima along with his immediate family disappeared shortly after the Dalai Lama proclaimed him the 11th Panchen Lama. Few hard facts exist concerning his whereabouts.