Thames Water deal follows talks in Beijing this week with chancellor George Osborne
The Chinese state has made its first direct investment in Britain's creaking infrastructure system, days after George Osborne took a begging bowl to China.
The sovereign wealth fund, China Investment Corporation (CIC), has bought an 8.68% holding in Kemble, the privately owned group that controls Thames Water, which has 14 million customers in and around London.
The move was confirmed in a one-sentence statement posted on the CIC website. No value was given nor the name of the seller but analysts said it was likely to have changed hands for between £600m and £700m.
The British government expressed delight and said it reflected a success for Osborne and David Cameron, who have been abroad separately this week trying to encourage state-owned funds in China and Saudi Arabia to invest in the UK.
The chancellor said: "It is a vote of confidence in Britain as a place to invest and do business. This investment is good news for both the British and Chinese economies."
Osborne held meetings with Wang Qishan, China's vice-premier, and Lou Jiwei, the chairman of the Industrial and Commercial Bank of China, and CIC on Tuesday.
The government has been looking at ways to support greater private sector and foreign investment in infrastructure and there has been speculation that China would help develop HS2, the proposed new high-speed rail link between London and Birmingham.
Before Christmas the Abu Dhabi Investment Authority took a 9.9% stake in Thames Water, while the Hong Kong-based tycoon Li Ka-shing acquired Northumbrian Water last year for just under $4bn (£2.6bn).
"The fact that people are still interested in water companies is a small positive [for listed UK water firms]," Angelos Anastasiou, an Investec analyst, said. "Over the medium term, there is potential [for more of such deals]."
Macquarie, the Australian bank that owns just under 40% of Kemble, said it had not diluted its holding and would not speculate on which shareholder inside its wider consortium of owners might have done so.
The Thames deal brings no new money into the business but CIC has $410bn in funds and is seen as a highly attractive new investor at a time when the water company needs to raise funds to renew parts of an ageing Victorian water and sewerage system.
In return, a holding in Thames offers CIC access to the stable returns offered by British water companies. High rates of inflation last year, from which British water operators are shielded by regulations governing price increases, highlighted the appeal of such companies to infrastructure investors seeking safe, predictable, long-term cash flows.
China has made no secret of its interest in buying plum European assets as the eurozone grapples with a debt crisis and countries such as Britain struggle to reduce escalating deficits.
Lou has previously said that China is keen to invest in outdated infrastructure in western countries, especially Britain, after previously concentrating on buying oil and mining assets in Africa.
Last November the state-owned China Three Gorges signed a deal to buy a stake in the top Portuguese utility EDP and the Chinese state shipping firm, COSCO, invested in Greece's biggest port in Piraeus.
Britain's infrastructure has long been targeted by more traditional foreign investors. The Spanish firm Ferrovial owns Heathrow and Stansted airports, EDF owns most of the UK's nuclear power stations and Germany's Deutsche Bahn recently bought the rail and bus operator Arriva. The ports company P&O, which owns UK assets at Tilbury and Southampton, was bought by the Dubai-based DP World in 2006. The Shanghai Automotive Industry Corporation became the owner of MG Rover's Longbridge plant in Birmingham after a merger in late 2007 with its smaller rival Nanjing Automobile Group.
The cars are designed and assembled in the UK, from parts made in China.