Jul. 7 – The leading Italian carmaker, Fiat, has signed a joint venture agreement with the Guangzhou Automobile Group to build a factory in Changsha, Hunan Province.

The 700,000 square meter factory is expected to produce 250,000 cars and 300,000 engines annually when it reaches maximum capacity. It will focus on making economy cars for the Chinese market like the Linea compact car when it begins production in 2011.

Fiat has committed EUR400 million in the venture that will hopefully give the carmaker a solid presence in the world’s most promising auto market. International carmakers are hoping that growing Chinese auto sales will offset declining demand from traditional Western markets.

This is not the first time the company tried to move into the Chinese market. The company inked a JV deal with Nanjing Automobile in the past only to quit years later when the deal failed to bring in profits and the local partner decided to merge with SAIC Motor.

Guangzhou Automotive Group’s Vice Chairman and President Zeng Qinghong said in a statement reported by The Wall Street Journal that Fiat’s technology in the economy car segment had made it an attractive partner, adding that the new joint venture won’t harm its existing operations with Japanese firms Honda Motor and Toyota Motor.

The Fiat agreement is part of the Chinese business mission to Italy headed by President Hu Jintao. The visit resulted in a total of 38 agreements amounting to US$2 billion including Italy’s Assicurazioni Generali buying 30 percent Guotai Amc, a Chinese saving management company and Ansaldo Breda (Finmeccanica)’s US$42 million deal to sell car components in China.

According to Italy’s Economic Development Minister, Claudio Scajola, last year’s bilateral trade reached US$38 billion.

Italy is China’s fourth largest trading partner in the Europe and also the fifth biggest source of European FDI for China.