The two companies are in the final stages of talks to spend 30 billion yen (2.4 billion yuan) to construct a factory in the northern city of Dalian. Starting in 2013, the plant will build 50,000 mid-sized vehicles a year, eventually raising annual production to 150,000 units, the Nikkei business daily reported earlier.

A Fuji Heavy spokesman confirmed that it is holding talks with Chery, but added that Fuji also is having discussions with several other Chinese carmakers. Chery could not immediately be reached for comment.

Fuji Heavy is one of the last major automakers to launch production in China. While Subaru sales have grown rapidly, imports have been limited by China's steep tariffs. The company expects to sell 57,000 units in China this year.

Fuji Heavy CEO Ikuo Mori told Reuters this month he wanted to reach a decision on how to produce cars in China by the end of the fiscal year in March.

Fuji Heavy has previously said that it could either build a joint-venture assembly plant or license production to a local automaker. Mori says he would prefer a joint venture.

Mori will visit China in January to discuss the plan, and the companies hope to announce a decision for a 50-50 joint venture by March, the Nikkei said.

Analysts say the partnership makes sense, given the companies' similar size and Chery's lack of foreign partners. "I think it's a good combination for both sides," said Lei Zhou, manager at consultancy Deloitte Tohmatsu Consulting. "Chery has no other foreign joint venture so it would be easy for Fuji Heavy to deal with."

A partnership with Fuji Heavy, known for its expertise in all-wheel-drive, boxer engine cars, likely would be welcomed by Chinese authorities who wish to support stronger local carmakers such as Chery and Geely Automobile.

Chery, one of China's top makers of small entry-level cars, faces pressure from local and foreign brands alike as they target China's fast-growing markets in inland cities.

This year, rival Geely this year purchased Volvo Car Corp. from Ford Motor Co. as it aims to expand both in China and globally.