Tesco and China Resources Enterprises (CRE), owner of the Vanguard chain, are in talks to combine their Chinese retail operations to create a £10bn business.

The pair have signed a memorandum of understanding for a deal in which Tesco would take a 20% interest.

Tesco said: “The partnership would bring together CRE’s deep understanding of local customers, established nationwide infrastructure and proven track record as a partner with Tesco’s global retail expertise, international sourcing scale and supply chain capabilities.”

CRE would combine its CR Vanguard business, which currently operates 2,986 stores across China and Hong Kong, with Tesco China’s 131 stores and shopping mall business.

The partnership, which follows other joint ventures between CRE and other multi-national firms, fits in with Tesco’s strategy of focusing on profitable growth routes in fast-growing, less mature markets but taking a disciplined approach.

It would also allow Tesco to concentrate on its domestic turnaround rather than trying to crack a market that many international retailers have found difficult alone.

Germany’s Metro Group decided to pull out China in January after two years of trading, while Home Depot said last year that it would close all seven of its DIY stores in the country.

Meanwhile, hopes are fading for a sale of Tesco’s US business Fresh & Easy that it decided to exit earlier this year.

A closure or break-up of the grocer is the most likely outcome, according to the Financial Times, which suggested that Tesco could incur costs more than the £1bn it suggested when revealing its exit plans in April.

It had been close to a sale of Fresh & Easy to Yucaipa, the investment vehicle of US billionaire Ron Burkle but talks are understood to have stalled, according to the newspaper.