The deal is worth HKdollars 3.39bn ( pounds 227m) to HSBC, whose shares firmed in London at the prospect of a profit on the disposal of pounds 215m.
The shares were bought at low prices between 1971 and 1983.
The sale substantially boosts the presence of the Chinese in Hong Kong's major airline. They already have a 12.5 per cent shareholding in Cathay, held through Citic Pacific, the locally listed arm of Peking's international investment company, China International Trust and Investment.
HSBC rejected suggestions that the disposal was part of a disinvestment from Hong Kong, saying total assets there had increased from HKdollars 444bn to HKdollars 545bn last year.
It said it had not put the shares on the market but was invited to to do so by Cathay after two organisations owned by the Chinese government had expressed an interest.
They are China National Aviation Corporation and China Travel Service (Holdings) Hong Kong, which are taking 5 per cent each.
HSBC's stake in Cathay peaked at 30 per cent in 1983 but has been reduced gradually since 1986.
The sale of additional shares to Chinese-owned companies is expected to smooth the path for Cathay after Hong Kong's return to China in 1997.
'The investment in Cathay by Chinese aviation concerns would certainly result in better synergy than with Citic and should better ensure its post-1997 prospects,' Philip Mok, airline analyst at Barclays De Zoete Wedd Securities, said.
This was especially true for the second local carrier, Dragonair - also a Swire and Cathay unit and partly held by Citic - as it had taken over the bulk of Cathay's China routes, Mr Mok added.
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