Toyota and China’s First Automotive Industry (Group) will reach a final agreement next month to build a new passenger car plant in China, Bloomberg News reported, citing the Mainichi newspaper.

The Bloomberg report said the two companies will build the plant in the northern port city of Tianjin to make 150,000 mid-sized cars a year by 2010 and will also develop a new version of the Red Flag luxury car, the official car for China’s communist leaders.

Toyota spokeswoman Keiko Sato told Bloomberg that neither the company nor its partner have decided anything yet.

Bloomberg said that Japanese carmakers have lagged behind foreign rivals including and in their China expansion efforts, partly because of concerns about technology theft and government regulations though the car companies predict that demand in China will double to 1.5 million vehicles by 2005

“This won’t be the last alliance between Japanese and Chinese automakers this year,” Merrill Lynch Investment Managers fund manager Marc Desmidt told Bloomberg News. “They’ve got no choice. You can’t do it on your own.”

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Bloomberg said Toyota and First Auto would base the new version of the Red Flag on parts of Toyota’s Crown sedan and would equip the redesigned car with a three-litre engine.