A spokesman for Immigration Minister Amanda Vanstone said permanent protection visas have been issued to Mr Chen, his wife and their six-year-old daughter.
“It was granted today and means they can permanently live in Australia,” he told AFP.
Mr Chen’s visa comes six weeks after he abandoned his post as first secretary at the Chinese consulate-general in Sydney and sought political asylum in Australia.
He publicly accused China of operating a ring of more than 1,000 spies in Australia, saying he feared for his life if he returned home.
He had previously been given a temporary “bridging” visa which he said meant he still faced being sent back to China.
Mr Chen said he and his family are deeply grateful to Australia.
“We (are) still grateful to the Australian people (because) they understand us and give us protection,” he said, speaking to Australian Associated Press.
He said while he does not yet know where he will live or what he will do, he now has peace of mind.
“With the support of the Australian people I feel safe here,” he said.
Mr Chen’s initial application for political asylum was rejected, and he then applied for a protection visa.
He received the news on Friday during a visit to the Immigration Department in Sydney with his lawyer.
Greens senator Bob Brown, one of Mr Chen’s major supporters, welcomed the news.
“The granting of permanent visas for Chinese diplomat and defector Chen Yonglin and his wife and daughter is due to huge public sentiment which swept in to rescue him,” said Senator Brown said in a statement.
“Chen and his family will be valuable Australian residents. I congratulate him. His conscience and his courage have been rewarded by this nation if not its government.”
Foreign Minister Alexander Downer has repeatedly said that Mr Chen’s application would have to go through the usual channels, regardless of what he was claiming.
Under the visa, Mr Chen is entitled to live in Australia as a permanent resident and access Medicare, social security benefits and a full range of workers’ rights.
He can choose to become an Australian citizen after living in the country for at least two years.