The agreement, signed on Tuesday by Sir Iain Vallance, the BT chairman, and Zhang Ligui, the director general of China Telecom, provides for the two companies to swap technology and examine business opportunities.
The MoU brings BT into competition with Cable & Wireless, its UK rival, which hopes to use its presence in Hong Kong to forge links with China Telecom and tap into the expansion of the Chinese telecoms market.
Mr Ligui said: "China Telecom is very keen to develop strong links with BT. A modern and strong telecommunications infrastructure is an essential element to China's future economic development and it is important we widely co-operate with leading carriers such as BT."
Initially, the agreement will be limited to training and exchange of technologies but BT executives believe it could be the start of a much bigger alliance.
It opened an office in Peking just over a year ago and has been looking at ways to enter the Chinese telecoms market, which is growing at a rate of 10 million new lines a year. This is the equivalent of BT's domestic network growing by half every 12 months.
Last June C&W sold a 5.5 per cent stake in Hongkong Telecom to China Telecom for pounds 726m, reducing its majority shareholding to 54.5 per cent. At the time C&W said the deal would provide opportunities for it to co- operate with China Telecom in the Chinese market. It also held out the possibility of a further reduction in its shareholding in Hongkong Telecom to bring the C&W and China Telecom stakes into line.
Reacting to the agreement between China Telecom and BT, a C&W spokesman said: "We are pleased with our relationships in China and we are confident that C&W and Hongkong Telecom will have big roles to play in this huge market."