Chery Automobile and Italian carmaker Fiat will establish a joint venture to produce and distribute cars, further cementing ties between the two companies.
Each firm will have a 50 per cent stake in the venture, set to start production in 2009 with an annual capacity of 175,000 cars.
The venture will produce and distribute Alfa Romeo, Fiat and Chery branded cars.
Fiat is seeking new partnerships in the mainland after expressing unhappiness over its tie-up with Nanjing Automobile Group. Chery, the nation's fourth-largest carmaker, earlier this week signed a contract to sell engines to Fiat.
Fiat China Zheng Xiaoli said investment in the joint venture was still under discussion and details would be disclosed later.
Chery will supply 100,000 1.6 litre and 1.8 litre petrol engines annually to Fiat under the earlier agreement.