The exercises, which began around 12 pm (0400 GMT), involve "live-firing", according to state media.
"Six major areas around the island have been selected for this actual combat exercise and during this period, relevant ships and aircraft should not enter the relevant waters and airspaces," state broadcaster CCTV reported.
The exercises will take place in multiple zones around Taiwan -- at some points within just 20 kilometres (12 miles) of the island's shore -- and will conclude at midday on Sunday.
Taiwan's defence ministry said it was closely watching the drills and that the island was prepared for conflict, but would not seek it.
"The Ministry of National Defence stresses that it will uphold the principle of preparing for war without seeking war, and with an attitude of not escalating conflict and causing disputes," it said in a statement.
Beijing's nationalist state-run tabloid Global Times said, citing military analysts that the exercises were "unprecedented" and that missiles would fly over Taiwan for the first time.
"This is the first time the PLA will launch live long-range artillery across" the Taiwan Strait, the newspaper said using the Chinese military's formal name, the People's Liberation Army.
Taiwan has described the exercises as "an irrational move to challenge the international order".
The Group of Seven industrialised nations also condemned the drills, saying in a statement there was "no justification to use a visit as pretext for aggressive military activity in the Taiwan Strait".
'Preparation for actual combat'
Taiwan's Maritime and Port Bureau issued warnings on Wednesday to ships to avoid the areas being used for the Chinese drills.
The Taiwanese cabinet said the drills would disrupt 18 international routes passing through its flight information region (FIR).
Beijing has defended its military operations as "necessary and just", pinning the blame for the escalation on the United States and its allies.
"In the current struggle surrounding Pelosi's Taiwan visit, the United States are the provocateurs, China is the victim," foreign ministry spokeswoman Hua Chunying told a regular briefing Wednesday.
A Chinese military source also told AFP the exercises would be staged "in preparation for actual combat".
"If the Taiwanese forces come into contact with the PLA on purpose and accidentally fire a gun, the PLA will take stern countermeasures, and all the consequences will be borne by the Taiwanese side," the source said.
Taiwan's 23 million people have long lived with the possibility of an invasion, but that threat has intensified under president Xi Jinping, China's most assertive ruler in a generation.
Just 130 km wide at its narrowest point, the Taiwan Strait is a major international shipping channel and all that lies between democratic Taiwan and its giant authoritarian neighbour.
It is now a flashpoint between the United States, Taiwan and a Chinese leadership keen to project strength ahead of a crucial ruling party meeting this autumn at which Xi is expected to be given an unprecedented third term.
"China's announced military exercises represent a clear escalation from the existing baseline of Chinese military activities around Taiwan and from the last Taiwan Strait Crisis in 1995-1996," said Amanda Hsiao, senior analyst for China at the International Crisis Group.
"Beijing is signalling that it rejects Taiwan's sovereignty."
Nevertheless, analysts have told AFP that China is not aiming to escalate the situation beyond its control -- at least for now.
"Clearly they recognise that there are some limits to what they are willing to do," Chong Ja Ian, an associate professor at the National University of Singapore, told AFP.
And Titus Chen, an associate professor of political science at the National Sun Yat-Sen University in Taiwan, said: "The last thing Xi wants is an accidental war."