'The significance of this deal is that it sets a precedent. We're the first company with significant telecom business anywhere in the world to have a Chinese incumbent carrier taking a 20 per cent stake,' said Alex Arena, PCCW group chief financial officer.

Neither China Netcom executives nor PCCW chairman Richard Li Tzar-kai appeared at yesterday's announcement, but Mr Li later told the South China Morning Post: 'This is not the end game, it is the beginning of the game.'

China Netcom will pay $5.90 per share - or a 25.5 per cent premium to PCCW's Wednesday closing price of $4.70 - to acquire 1.34 billion new shares in the company.

Mr Li remains PCCW's largest shareholder but his interest in the firm will shrink from 32 per cent to about 25.5 per cent.

Terms of the deal had been widely leaked in recent weeks and most analysts were disappointed that PCCW did not unveil a deal with China Netcom to invest directly in the mainland. Proceeds from the share sale will be retained as an investment war chest rather than used to pay down PCCW's net debt of US$3.8 billion.

Both companies would seek opportunities in the mobile, fixed-line and broadband sectors, Mr Li said. 'We are looking to do basic telecom services in China, which [will have an impact] on total revenues and ebitda [earnings before interest tax, depreciation and amortisation].'

Three China Netcom Group executives will join PCCW's board, one of whom will act as a deputy chairman. Future investment opportunities will be overseen by a committee equally represented by both firms' executives.

Early co-operation would see PCCW managers work at China Netcom in a skills transfer exercise charged on a 'cost plus' basis, Mr Li said.

Investors, however, are likely to focus on the dilution of earnings arising from the share sale without a corresponding acquisition of income-earning assets.

Mr Li said he expected to make a 'range of announcements' within six months but it could take a year for a 'substantive transaction' to be reached. Mainland investments could account for 25 per cent of the carrier's revenue within two to three years, he speculated.

'Beijing needs to demonstrate that it will allow another foreign carrier into China,' Mr Li said, referring to the low overseas participation in the mainland telecoms sector because of ownership restrictions.

PCCW is Hong Kong's dominant telecom operator but has bled market share in recent years due to intense competition.

In recent weeks a price war for bundled broadband, pay-television and voice services has intensified, suggesting that revenues will be further squeezed.

Credit ratings agency Moody's Investor Services yesterday reaffirmed PCCW-HKT Telephone's credit rating, saying the injection of fresh capital was 'mildly positive'.

ABN Amro analyst Helen Zhu wrote in a report: 'In the absence of a substantial co-operative agreement between the two companies, we would view the overall deal as negative or at best neutral to equity shareholders of PCCW.'

China Netcom Group chairman Zhang Chunjiang called the deal a win-win transaction for both firms.

Additional reporting by Simon Pritchard

- China Netcom pays $7.9 billion for 20 per cent stake in PCCW

- It buys 1.34 billion new shares at $5.90 per share

- China Netcom will become No 2 shareholder in PCCW

- Richard Li Tzar-kai remains controlling shareholder with a 25.5 per cent stake