Jia Xinguang, an independent auto analyst based in Beijing, said the capital boost for PSA may help Dongfeng make a foray into European markets.

"The Chinese government will support the State-owned company to acquire the stake, giving it a green light from China's side," said Jia. "Now the focus of the deal is whether Dongfeng can benefit directly from the deal."

Zhang Zhiyong, another auto analyst, said: "The acquisition of a big stake in PSA will help Dongfeng promote its brand globally and reinforce the reputation of China's automobile industry".

However, he suggested Dongfeng should ask PSA to shift its market focus to China during the discussions, "so that Dongfeng may benefit from PSA's technology and product advantages".

Currently, PSA manufactures vehicles in three factories in China, under the joint venture Dongfeng Peugeot Citroen Automobile Co Ltd, which was established in 1992 in Wuhan, Hubei province.

The venture saw a sales boom of 25 percent year-on-year to 550,000 vehicles last year.

In 2013, Dongfeng Motor sold 3.53 million vehicles in China, a 14.8 percent increase from a year earlier.

In addition to a partnership with Japanese automakers Nissan Motor Co Ltd and Honda Motor Co Ltd, Dongfeng signed a $1.3 billion joint venture agreement with Renault SA in December, the first production facility with the French automaker in China.

According to a recent report released by accountants and consultants KPMG, China will not only be the world's largest auto market over the next five years, but 10 out of the top 20 automakers expected to gain a larger market share globally will also come from China.