Instead of Malabo - located on Bioko island, separate from the mainland - Ciudad de la Paz in the heart of the tropical rainforest is now the capital of Africa's only Spanish-speaking country.
The move to the mainland was justified by the need for "deconcentration and decentralisation of state functions," a presidential decree issued on Saturday said.
Both Malabo and the port city of Bata, the country's main economic hub, have experienced rapid growth.
"Uncontrolled growth has brought with it considerable challenges in urban planning, a strain on basic services, increasing regional inequality and congestion of transport and communication networks," the decree states.
Ciudad de la Paz, on the other hand, has potential for urban expansion, capacity for modern administrative infrastructure and connections to other regions, it adds.
The city is 70km from Obiang's home district.
The president, who has extensive powers, has been in office since a military coup in 1979.
At that time, Obiang, now 83, overthrew his uncle, who was the first head of state after independence in 1968.
Although elections are held regularly in Equatorial Guinea, neither human rights organisations nor the European Union consider them to meet democratic standards.
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