The French state will match Dongfeng's stake in PSA, making up for the reduced share now held by the Peugeot family, which had controlled the company since founding it in 1810.
Peugeot and Dongfeng have set targets to sell 1.5 million vehicles per year from 2020, mainly in China and Asia. A new joint research and development centre will be built in China to focus on developing new technologies for emerging markets as part of the deal. Among that technology is believed to be a new small-car platform.
The company also revealed a new capital tie-up with Dongfeng worth €3 billion (£2.5 billion), which will be used to buy time for PSA to recover following another round of poor financial results in 2013.
PSA's financial results, released today, show that group revenues dropped by 2.4 per cent in 2012 to €54.1 billion (£44.6 billion), while revenue from the automotive division fell by almost five per cent. As a group, PSA held debt of over €4 billion (£3.3 billion) at the end of last year. The company warned it may not halt losses until 2016.
Speaking at a press conference, incoming PSA boss Carlos Tavares said he saw "potential for improvement" in Europe, saying that with the new deal "PSA is back, and we will write another chapter in its history".
Tavares revealed a new plan to aid the recovery of PSA, focusing on giving the brand greater differentiation between vehicles to improve its market position, while also growing its competitiveness in Europe. "We need to identify models that create value," he said.
Current President Philipe Varin said Dongfeng's investment would be used "to invest more in R&D to stay in the race, and we must invest in our plants in Europe and beyond".
Quashing rumours that Dongfeng's influence would cause PSA to 'go Chinese', Varin said: "PSA will remain independent in the future, but we will benefit from the support of our Chinese partner both there and in Asia. We will remain French with our own identity.