News agency Reuters says the deal could be signed this month, with both Dongfeng and the French government investing around £1 billion in PSA in exchange for owning between 20 and 30 per cent of the company. As a result, the Peugeot family would lose control of the firm, as they would have to surrender some voting rights and dilute their 25.4 per cent stake in the business.
A Peugeot spokesman told Reuters: "Peugeot confirms it is studying new industrial and commercial projects with different partners, as well as the financing to accompany them. None of these plans have yet reached an advanced stage."
Dongfeng already operates as PSA's Chinese partner, and the two companies already operate three assembly plants in China. The firm recently denied a deal was in the offering, telling Chinese media it was still doing 'preliminary research' into investing in PSA.
This potential move by Dongfeng could provide a headache for PSA's partnership with General Motor's Opel-Vauxhall brands. GM already owns a seven per cent stake in PSA and the two have just announced plans to merge production of their respective compact MPV and SUV models onto a PSA platform.
PSA's financial troubles have been well documented, with the company revealing a £4.3 billion loss in the 2012 financial year alongside automotive revenue falling by over ten per cent.
That was followed with news in June that the Peugeot family could step back to allow GM to take over the company. It was widely felt that the Peugeot family announcement was intended to underline the seriousness of the car maker's financial position.
Any deal between Dongfeng and PSA will also face domestic hurdles, as PSA is currently in talks with unions - reputedly to reduce overtime pay and freeze salaries in exchange for more French production and investment. Any deal would require those talks to be completed.
Darren Moss & Hilton Holloway