Flores led the Hornets to 13th place in the Premier League and an FA Cup semi-final during his one season in charge at Vicarage Road in 2015/16.
The 53-year-old, who has also managed Benfica, Atletico Madrid and Valencia, had been in charge of La Liga side Espanyol until his sacking in April.
Flores will be tasked with improving Shenhua's fortunes after they finished seventh in the Chinese Super League last season, 30 points behind winners Shanghai SIPG.
He will be assisted by a five-strong backroom team, including assistant coaches Antonio Diaz and Dean Austin, as they prepare their side for the start of the new Chinese season in March.
Former Shanghai Shenhua head coach Wu Jingui will take over as sporting director.
"[We] hope they will get familiar with the team as soon as possible through winter training, instil their football techniques and tactics in the players and help the young players in the team grow faster," the club said in a post on Weibo, China's equivalent to Twitter.
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