China Netcom, China's second-largest teleco, is buying a 20 percent stake in Hong Kong's dominant operator, PCCW.

After months of negotiations between the two companies, China Netcom has agreed to pay HK$7.9 billion (£542m) - in cash for a fifth share.

"The logic is not that apparent," said Duncan Clark, managing director of BDA China, a telecommunications consultancy in Beijing. The two companies are looking for ways to help each other expand their respective markets, Clark said. PCCW wants to expand out of Hong Kong and reach into China, while China Netcom wants to expand beyond its base in northeastern China and tap into southern China's lucrative market, he said.

However, it's not immediately clear to what extent the tie-up will help either company realise these objectives or in what areas they hope to cooperate, Clark said. "Caution is the watchword for this deal," he said.

The deal is subject to the approval of PCCW's shareholders. PCCW will announce plans for a shareholder meeting to approve the deal at a later date. If approved, China Netcom will help shape the future strategy of the company, the two companies said in a statement. China Netcom will nominate three directors to join PCCW's board of directors and one of those directors will also become a deputy chairman.

For its part, PCCW will set aside up to HK$5 billion (£343m) for telecommunication-related investments in China and will create a business development committee for China comprising two PCCW executives and two China Netcom executives, the companies said.