Dongfeng and the French state will each pay 800 million euros for a 14 percent stake in the carmaker, Peugeot said in a statement. The companies will add new models in Asia to target 1.5 million annual sales soon after 2020.
Separately, Peugeot also announced a 2013 net loss that narrowed to 2.32 billion euros ($3.07 billion) from 5.01 billion euros in 2012.
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The rescue deal will help Peugeot - founded in 1810 as a maker of tools and coffee grinders - survive the withdrawal next year of 7 billion euros in state guarantees to its sales financing arm, which is keeping the French firm afloat.
Donfeng shares provisionally closed down 1 percent in Hong Kong trade, but its China mainland-listed shares were higher by 3.25 percent. Shares of Peugeot surged nearly 6 percent at the session open in Europe on Wednesday, although they closed the day down by 1.5 percent.
Kevin Gardiner, chief investment officer for Europe at Barclays said the French company's need for capital showed how vulnerable carmakers in the euro zone are. However, he wasn't surprised that the Asian and European companies decided to join hands.
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"It does illustrate though that we have this caricature in the back of our minds often that global competition is all about head-to-head competition...it's either the West or the emerging world," he told CNBC Wednesday.
"You know often there is a lot of symbiosis, there are a lot of joint ventures. The two largest car producers in China to begin with are Western companies active in joint ventures with local companies."
- Reuters contributed to this report.