The Australian regulator, the ACCC, reversed an earlier decision and cleared a code-sharing deal between Qantas Airways and China Eastern Airlines after the carriers agreed to increase flights between their countries by a fifth.
The ruling enables the airlines to sell flights between several Australian cities and the mainland. It is likely to boost Australia's biggest tourism market and deepen ties between the two countries.
"The ACCC considers that the addition of a significant number of new services, and expanded range of destinations... would constitute a significant public benefit," commission Chairman Rod Sims said in a statement.
In a draft decision in March, Sims said he may block the deal because it could hurt competition on the Sydney-Shanghai route in which the airlines currently compete.
The airlines now must commit to growing capacity between Australia and Shanghai by 21 percent in the next five years, a measure which would offset fare increases by easing demand, and report their Sydney-Shanghai fares monthly.
In a statement, Qantas chief executive Alan Joyce said the deal "allows us to increase capacity between the two countries by linking to key hubs and offer connectivity to each carrier's... networks".
China Eastern chairman Liu Shaoyong said it would "generate more tourism and trade opportunities with Australia and provide more convenient travel options for the many customers who travel between our two countries".