Volkswagen plans to build a new plant in China to help it reach an annual production capacity of 1.6 million vehicles by 2008.

According to Reuters, VW CEO Bernd Pischetsrieder and management board member Folker Weissgerber signed a corresponding letter of intent on Sunday together with one of its two Chinese partners, Shanghai Automotive Industry Corp.

Volkswagen, which increased deliveries in 2003 by 36% to 698,000 cars in China, also builds cars for the local market with its other joint venture partner, First Automobile Works, the report noted.

"This year we're aiming to produce and sell more than 800,000 vehicles in China," Pischetsrieder reportedly said, adding: "We will double this volume by 2008."

The agreement was reportedly signed during an official visit by Chinese prime minister Wen Jiabao to VW's luxury unit Audi in Ingolstadt.

Following a review of its operating efficiency and utilisation, the group plans to sign a contract to build the factory near Shanghai, which will have an initial capacity of 150,000 vehicles annually starting in 2006, Reuters said.

The carmaker also reportedly said on Sunday that its Shanghai Volkswagen joint venture would increase its capital by 1.5 billion renminbi to 7.8 billion in connection with the launch of its Touran compact minivan in China this year.

Reuters noted that, due to its high-double digit growth rates, the Chinese car market became Volkswagen's most important single market outside of Germany in 2002 - the group has a market share of more than 30% in China.

Based on current exchange rates, VW plans to invest roughly $US6.27 billion in China in the next five years and the group is also considering the construction of a new engine factory there, Reuters said.

VW's premium brand Audi aims to boost vehicle sales by roughly 10% in China this year, the unit's CEO said on Sunday, according to the report.

"Should the trend from the first quarter continue, we expect to sell approximately 70,000 Audis," CEO Martin Winterkorn reportedly said.

Reuters noted that Audi deliveries to China rose by more than 70% to 63,531 vehicles in 2003.