Under the agreement Dongfeng and the French government will each invest about €800m in return for 14% stakes. A further €1.4bn will be raised by the firm’s existing shareholders.

In a statement, Peugeot said: ‘The strengthening and deepening of the existing industrial and commercial partnership with Dongfeng Motor Group’ would ‘capitalise on the group’s current success in the world’s largest automobile market, which is now the primary source of growth for the automotive industry’.

The deal is subject to the approval of regulatory bodies, notably in France and China, as well as the approval of the Extraordinary General Meeting of Peugeot SA shareholders due to take place in the second quarter of 2014.

The deal means the Peugeot family's stake will be reduced from 25.4% to 14% to match those of the French government and the Chinese carmaker. In addition, the family will see its number of board seats reduced from four to two and Thierry Peugeot stepping down as the family’s last chairman.

The new arrangement – which builds on over 20 years of partnership between the two firms – also calls for a joint commitment to take their 50/50 joint venture, DPCA, into a new phase of growth, with the objective of tripling its volumes to 1.5 million vehicles per annum by the early 2020s, as well as the creation of a joint R&D centre for fast growing countries, including China, and the creation of a new joint venture to drive the sales of PSA Peugeot Citroën and DFG vehicles in the rest of Asia and possibly other emerging markets.

The deal comes as the carmaker posted a €2.32 billion net loss, compared to a €5bn loss in 2012, and said that it may face losses until 2016.

Philippe Varin, chairman of the PSA Peugeot Citroën Managing  Board, said: ‘We have gone through some very challenging years for the European automotive industry, which have added to the group’s structural difficulties, notably its over-dependence on Europe. We vigorously implemented difficult restructuring measures which are now starting to bear fruit. We also launched core models this year that have exceeded their initial sales targets. The globalisation process is proceeding apace, with in particular an excellent performance in China.

‘The exceptional mobilisation of all our employees has enabled us to lay the foundations for a turnaround in Europe and to return to profitable growth.

‘With today’s announcements, we are giving a new impetus to our group, with an ambitious industrial and commercial plan, and solid financial resources.’