The State Council said on its website late last evening that the goal to control the size of the city was part of Shanghai's masterplan for 2017-2035, which the government body had approved.
"By 2035, the resident population in Shanghai will be controlled at around 25 million and the total amount of land made available for construction will not exceed 3,200 square kilometres," it said.
China's state media has defined "big city disease" as arising when a megacity becomes plagued with environmental pollution, traffic congestion and a shortage of public services, including education and medical care.
Shanghai, which sits on China's eastern coast, had a permanent population of 24.15 million at the end of 2015, the official Xinhua news agency said last year.
The city has also said it would intensify efforts to protect the environment and historic site as part of its masterplan.
(Reporting by Brenda Goh; Editing by Paul Tait)