Korean Air says it has signed a preliminary agreement to take over China's new budget airline, Okay Airways.

The announcement came after Korean Air said in June it was in talks with Okay on a possible joint venture.

Korean Air will finalize pricing, acquisition terms as well as timing after due diligence, KAL said in a statement.

Under Chinese law, a foreign company is allowed to buy a stake of up to 25 percent in a Chinese airline, while the combined stakes held by foreign investors are limited to 49 percent, the statement said.

Okay Airways, based in the northern Chinese city of Tianjin, started flights early this year. It subleased its first two Boeing 737-900s from Korean Air.