China's SAIC Motor Corp. and Nanjing Automobile Corp. sign an agreement intended to create a national car company and challenge foreign auto makers in China.

The two state-owned car companies originally announced in July their intent to form a “complete union” via business cooperation and restructuring.

SAIC, China's largest auto maker, reportedly is paying RMB2 billion ($285 million) for Nanjing's vehicle and core auto-parts operations, which includes the classic MG brand.

In return, Nanjing's parent, Yuejin Motor (Group) Corp., receives 320 million shares for a 4.9% stake in SAIC Motor from parent Shanghai Automotive Industry Corp.

The two Chinese auto makers bid against one another for Britain's now-defunct Rover Group two years ago, with Nanjing acquiring the rights to the MG brand and launching its first China-made MG 7 sports cars in March.

SAIC builds its own model, the midsize Roewe 750 sedan, also based on former Rover Group technology.

Meanwhile, in a joint statement with Nanjing, Fiat Automobile SpA says it is pulling out of its long-standing joint venture with the Chinese OEM. Fiat has made no secret of its unhappiness with the deal, reportedly complaining about Nanjing's tepid interest in the partnership while it pursues building MG cars.

However, Nanjing Chairman Wang Haoliang says his company and Fiat will continue their cooperation in commercial vehicles and auto parts manufacturing.

The decision to sell its 50% stake in the Nanjing passenger-car venture to SAIC “gives us total freedom of action to concentrate on the restructuring of our automotive business in China,” Fiat Chairman Sergio Marchionne says in a statement.

Fiat earlier this year announced it was setting up a JV with Chery Automobile Co. Ltd. to produce 175,000 passenger cars annually from 2009. The cars will be sold domestically both as Fiat and Chery brands. In a separate agreement, Chery is supplying Fiat with more than 100,000 engines a year.

Shanghai Auto and Nanjing say in a joint statement their deal is intended to build SAIC into a world-class auto company, with Nanjing as its major automotive production base.