General Motors has started making an electric version of its popular Chevrolet New Sail in China and will roll out prototypes before the end of the year, making it the first foreign automaker to build electric cars in the world's biggest market.

"Shanghai GM has started making the electric New Sail and a prototype will be available at the year end," a source with knowledge of the matter told Reuters on Thursday. It will initially roll out a small number of electric New Sail cars to test the market, said the source.

A GM China spokeswoman confirmed the plan, saying it's part of Shanghai GM's green vehicle campaign.

SAIC Motor Corp and GM a day earlier said they had signed a non-binding memorandum of understanding "to reinforce their collaboration in certain core areas of their business, including the development of new energy vehicles..."

In June, the Chinese government unveiled a pilot scheme to hand out subsidies to buyers of fuel-efficient cars in five cities but the handouts, which favour electric vehicles and plug-in hybrids, only cover locally made green models, reflecting Beijing's resolve to promote domestic brands, such as Warren Buffett-backed BYD.

Buyers for BYD's F3DM plug-in hybrid could enjoy a roughly 30% discount of the price tag of CNY169,800 (US$24,870).

That puts GM's Chevy Volt, which it will roll out in China in late 2011, and Nissan Motor's Leaf at a significant disadvantage and makes the models too expensive for many Chinese buyers.

Renault, however, has said there will be room for imported EVs at the higher end of the market. Media reports this week said Toyota would not build its next Prius hybrid in China as a result of the new Beijing subsidy policy.

But the locally made electric New Sail would be eligible for the subsidies, which could run as high as 60,000 yuan per car, giving the Detroit automaker an edge over its rivals, industry observers told Reuters.

GM's Shanghai venture also plans to launch the hybrid version of its popular Buick New Regal in 2011 as part of its ongoing green auto initiative.

Other foreign automakers are also getting ready to join the green car race. Nissan, which runs an auto venture with Dongfeng Motor Group, had earlier signed a deal with the municipal government of Wuhan to jointly promote its Leaf in the central Chinese city.

Toyota Motor also added a Camry Hybrid to its China-made green auto line-up, which also includes the Prius.