Forward Qu Bo struck twice to give China a 2-0 victory over Hong Kong earlier in the day and hosts Japan needed to beat the Koreans by three goals to win the four-team tournament.
The Chinese finished with seven points to South Korea's six with Japan third on four points. Hong Kong lost all three matches played without threatening to score a goal.
"This title is a reward for everyone involved in Chinese football," China coach Gao Hongbo told reporters. "It demonstrates China's potential.
"We are learning from South Korea and Japan and if we continue working hard and improving we can catch up with the top teams in Asia."
There was no love lost in a bruising clash between the World Cup-bound Japanese and Koreans, who fell short of retaining their title while struggling Japan were once again booed off the pitch.
Yasuhito Endo put Japan ahead from the spot in the 22nd minute before Lee Dong-gook blasted home another penalty to level 11 minutes later and silence the crowd of 43,000.
Strike partner Lee Seung-yeoul gave the Koreans the lead after 39 minutes with a fierce shot from 30 metres which took a slight deflection off Yuji Nakazawa.
The away players celebrated by racing to the bench and sinking to their knees to perform a traditional Korean New Year's bow to coach Huh Jung-moo.
Midfielder Kim Jae-sung curled in a superb third for the dominant Koreans in the 70th minute.
RED MIST
Japan defender Tulio was shown red for elbowing Cho Yong-hyung just before halftime while Korea captain Kim Jung-woo walked after a second bookable offence in the 52nd minute.
"Tonight's victory is a New Year's gift for the Korean people," said Huh. "The players were excellent. They carried out our tactics perfectly.
"We tried out a few new players who could be with us at the World Cup," added Huh, who was missing several key European-based players, including Manchester United's Park Ji-sung.
"We've gained some valuable material to analyse that will help our preparation for South Africa."
Japan coach Takeshi Okada, who has been criticised after declaring his World Cup target was a semi-final place, insisted he would not be stepping down.
"There is no magic formula and there will be no overhaul of the team," said a defiant Okada. "The Japan Football Association (JFA) are the ones with the right to terminate my contract.
"As long as I have the support of the players we will continue to work towards our goals and won't be changing our target."
A furious JFA president Motoaki Inukai slammed Japan's performance but stopped short of saying Okada's job was in danger.
"We lacked fighting spirit," he fumed. "There would be good points and bad points about firing (Okada).
"We will make a collective decision but the timing might not be right to take the risk at this stage."
China held hosts Japan to a goalless draw before stunning South K
