Chinese official informed that Italy's Fiat SpA has hit an agreement with Guangzhou Automobile Industry Group to set up a joint venture to start making low-priced cars from May 2011.

Fiat, which had been struggling hard to find a joint venture partner in China, is going to invest EUR400 million to build a new factory in Changsha, China.

Speaking on the issue, Claudio Scajola, Italy's Industry Minister, said, the agreement "is very important as part of Fiat's overall expansion."

In addition, Fiat recently bought a 20 percent stake in U.S. automaker Chrysler LLC.

At the outset the joint venture would produce 140,000 cars per year, and later the no. of cars would be increased to 250,000 per year.

The C-segment Linea sedan is going to be the first model to be produced and the Fire 1.4 liter 120 horsepower and T-Jet 150 horsepower will be the first engines to be used.

Earlier in March, China's Chery Automobile Co eschewed a joint venture with Fiat due to economic slump.

In the recent trading, Fiat's stock was down 2 percent at EUR6.92.