Yang Jing was secretary-general of the state council, the country's cabinet, and had once been considered a likely pick for vice premier.
But now he has been demoted due to "severe disciplinary violations" the official Xinhua news service said, adding that he would be put on probation for a year after admitting his errors.
Yang was accused of using his position to benefit himself and his family and "associating with lawless businessmen and members of society".
It was unclear whether he will be subject to criminal charges.
Yang, who is of Mongolian ancestry, is one of the few ethnic minorities to have risen to the highest ranks of power in China, where most top politicians are from the Han majority.
He spent decades working in Inner Mongolia, rising to become the region's chairman before being put in charge of the State Ethnic Affairs Committee.
In 2013, he was promoted to the state council, where he was considered a rising star.
But he failed to earn a spot in a top leadership circle of the ruling Communist Party, known as the Central Committee, during a twice-a-decade political gathering last October, stoking speculation that he could soon fall victim to President Xi Jinping's anti-corruption campaign, which has claimed huge numbers of scalps at all levels of government.
While Xi's effort to rid China of its endemic graft has been immensely popular, it has also raised concerns that the president is using it as a tool to consolidate his political power and eliminate potential opponents.
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