An essential problem encountered in a railway freight transport system is determining the best formation plan on a capacity-constrained physical network. The formation plan is not only the foundation of railway operations, but also the basis of train scheduling, yard and terminal management, and infrastructure resource planning. An integrated optimization of the traffic routing and train formation plan aims at designing a globally optimal train service network to decide: between which pairs of reclassification yards (terminals) should provide a block, the frequencies of the train services, the physical paths of traffic, and the block sequences of shipments. This study proposes a non-linear binary programming model to address the integrated problem to minimize the total costs of accumulation, reclassification, and travel distances while satisfying various practical requirements. An efficient simulated annealing based heuristic solution approach is developed to solve the mathematical model. We use a penalty function method to tackle the capacity constraints and a customized method for the operational requirements. The feasibility of the solving approach is tested using a numerical case study based on the east-west railway channel of China. The computational results of a national-scale example based on the China railway network consisting of 235 nodes indicates that the proposed model and approach can achieve good quality solutions within an acceptable computing time.