Both parties hope the partnership will help grow the domestic music scene and provide fresh inroads into a potentially huge and largely untapped market for UMG's international roster of artists.
"We're looking forward to working with Tencent as we develop local Chinese artists and repertoire, as well as global stars, in this dynamic and expanding music market," said Universal Music Group Chairman and CEO Sir Lucian Grainge in a statement announcing the deal.
"Given recent developments in technology and the commercial environment there, now is the right time for an innovative strategic partnership with a leading Chinese company like Tencent that can meaningfully accelerate the development of the country's entire music ecosystem and, in turn, inspire growth in creative and commercial opportunities for all artists," Grainge went on to say.
"Leveraging UMG's resources and our distribution capabilities, we can provide a rich and personalized experience to hundreds of millions of music lovers in China," added Cussion Pang, CEO of TME.
Referring to China's long held problems with piracy, Pang said that the strategic agreement will "further strengthen our efforts in copyright protection and shift the industry towards the paid subscription model." Meanwhile, the establishment of Abbey Road Studios China will "help local artists produce top-quality recordings for distribution in China and across the world."
Founded in the south eastern Chinese city of Shenzhen in 1998, Tencent has been at the forefront of building a legitimate music business in China, which despite its huge population of 1.36 billion people has never ranked among the top 10 music markets, largely due to rampant piracy.
Streaming is slowly beginning to unlock the country's potential, however, with recorded music sales growing by over 20 percent in 2016, according to IFPI figures. In its 2017 "Global Music Report," IFPI ranks China as the 12th largest market, up from 14th in 2015.
To further build on that growth, Tencent -- which already has licensing deals in place with Warner Music and Sony Music -- offers a range of low-price monthly subscription models, ranging from 8 yuan (just over $1) to 15 yuan (around $2), to encourage conversion from free services. Compared to U.S. and European markets, returns are low, but the fact that Chinese music fans are now beginning to pay for music is seen as a positive step in truly opening up a major new music market.
"The digital opportunity in China's music market is truly extraordinary," says Michael Nash, UMG executive vice president of digital strategy, in a statement welcoming the deal with Tencent.
"Chinese consumers are clearly embracing licensed services, fueling an expansion of China's music economy, increasing the importance of this market internationally and accelerating the development of Chinese artists for the enrichment of China's culture and the enjoyment of audiences globally," Nash continued, saying that UMG's partnership with TME will leave the major well placed to "fully address this opportunity."