The agreement would give struggling PSA Peugeot Citroen much-needed capital while state-owned Dongfeng Motor Co. gains access to a well-known brand and advanced technology to help expand its share of the Chinese auto market.
Dongfeng said the Chinese company, the French government and the Peugeot family will own equal stakes in Peugeot and each is expected to gain equal voting rights.
Chinese companies, cash rich from the country's economic boom, increasingly are acquiring stakes in foreign brands to improve their competitive edge at home and diversify by expanding abroad.
In a statement, Dongfeng said the French government is expected to buy the same number of shares as it on the same terms. That would bring Peugeot at least 1.6 billion euros ($2.2 billion), less than the 3 billion euros ($4.1 billion) it said earlier it hoped to raise.
Dongfeng said it and Peugeot will expand co-operation in technology, research and development, manufacturing and overseas distribution.
Dongfeng is one of China's biggest auto producers but is largely unknown abroad. In addition to its joint venture with Peugeot, it assembles vehicles for Japan's Nissan Motor Co. and Honda Motor Co. and manufacturers cars and trucks under its own name.
The agreement came after General Motors Co. in December sold its 7 per cent stake in Peugeot.
Dongfeng Motor: www.dfmc.com.cn