The joint venture will start producing Toyota-brand compact cars using the same platform as Vitz and Platz, Toyota's global strategic cars, from 2002 with annual production capacity of about 30,000 units, Toyota said in a statement.

Toyota's entry into China - the world's most populous country with 1.2 billion people but only 14.7 million vehicles on the road - comes just as the country is moving closer to winning membership in the World Trade Organisation (WTO).

Entry into the WTO, widely expected this year, would enhance freer trade in China by helping cut tariffs on imports.

"We have positive prospects for the Chinese market, with demand expected to increase in the aftermath of a likely Chinese entry into the WTO," Toyota's executive vice-president Kosuke Yamamoto told a news conference.

"We will do our best to make the venture fully competitive even in case of tariff cuts."

Toyota would be the third Japanese automaker, following Suzuki Motor Corp and Honda Motor Co Ltd, to form a joint venture in China to produce passenger cars.

Toyota, which once turned down request by the Chinese government to invest in China in 1980s, had lagged other global automakers in entering into the fast-growing Chinese market.

Toyota said the Chinese government also approved a plan by Toyota to provide technical support to Tianjin Auto, a move that would help the firm produce a redesigned model. The support plan outlined the output, starting next year, of a redesigned Xiali to be based on the Platz/Vitz models.

The new Xiali is to be sold under the Tianjin Auto brand.

Prior to the announcement, shares in Toyota sagged 2 per cent to end at 4,910 yen on the Tokyo Stock Exchange in line with a generally weak performance in the auto sector.

Tianjin Auto has domestic A shares listed on the Shenzhen stock exchange in southern China. Tianjin's A share rose 0.14 yuan to close at 6.80 on Monday.

For Tianjin Auto, the alliance with Toyota should bring easy access to the Japanese automaker's technology - a powerful weapon for the Chinese firm to weather competition with quality foreign imports that would follow China's WTO entry.

The tieup could make Tianjin Auto more competitive in China, where Shanghai Volkswagen - a joint venture between Germany's Volkswagen AG and the Shanghai Automotive Industry Corp -- has about a 40 per cent car market share.

"China's WTO entry will inevitably shock domestic carmarkers, but we are confident that our tie-up with Toyota will bring us edges in technology and goodwill," Tianjin Auto said in a statement issued last month before government approval.

Under a pact on WTO entry with the US, China will cut import tariffs on automobiles to 25 per cent by 2006 from the present 80-100 per cent, allowing a larger number to be imported.

This could lead to a wave of mergers and bankruptcies, and perhaps a surge in demand. State media have reported that some Chinese are waiting until WTO entry, predicting price falls.

Tianjin Auto's turnover grew 6.54 per cent in 1999 to 6.06 billion yuan, while a nearly 5 per cent fall in gross margins trimmed its gross profits to 938.57 million yuan from 1998's 1.12 billion. It scored about 8 per cent rise in sales of its Xiali minicars to 107,780, still short of annual capacity of 150,000.