Volkswagen said it would invest $700 million (632 million euros) in the Chinese auto brand, acquiring a stake of just under five percent in the Chinese brand.
Together, the two companies would develop two mid-sized VW-branded electric models to be rolled out on the Chinese market "in 2026", Volkswagen said.
Volkswagen also said its premium Audi brand had signed a memorandum with the group's existing Chinese partner SAIC to expand their cooperation and work on new high-end electric vehicles.
The local tie-ups were an "important building block" in German group's plans to produce vehicles in China for the Chinese market, VW's regional chief Ralf Brandstaetter said in a statement.
China is Volkswagen's most important market, accounting for around 40 percent of the group's overall sales.
But Volkswagen has fallen behind domestic competitors in China, losing its title as the best selling auto brand to BYD -- while it has fallen even further behind in the growing electric car market.
With the deal, Volkswagen was "accelerating the expansion of our local electric portfolio", Brandstaetter said.
CEO Oliver Blume has identified the Chinese market, along with North America, as key to growth for the Volkswagen.
The German group was determined to remain "the most successful international car manufacturer in China", where it currently has a 14-15 percent market share, Blume said in June.
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