Nepal is seeking closer ties and much-needed energy and infrastructure investment from China, which has flexed greater economic and diplomatic muscle in its Himalayan neighbour in recent years.
Beijing's growing presence has raised hackles in Nepal's traditional ally India.
The two countries signed more than 10 "cooperative documents" on Thursday during Prime Minister KP Sharma Oli's trip to China, according to the China Daily.
The new rail route will link Nepal's capital with the Gyirong trading port in the Tibetan city of Xigaze, according to the China Daily, citing a Chinese vice foreign minister.
Reports said the two sides signed eight agreements worth $2.4 billion on Wednesday, with Chinese investors ploughing money into developing hydroelectricity, water resources, cement factories, fruit cultivation and farming.
China is ready to work with Nepal to build an interconnectivity network across the Himalayas through ports, railways, highways, aviation and communications, Li said.
For his part, Oli expressed Nepal's support for China's Belt and Road initiative, a global trade infrastructure project, according to Xinhua. New Delhi opposes the initiative, as the $50 billion China-Pakistan Economic Corridor, which is part of the Belt and Road Initiative, passes through Pakistan-occupied Kashmir.
India, which has long considered Nepal part of its sphere of influence, has pledged its own major infrastructure projects to counter China's influence but Beijing still outspends it in the Himalayan nation.