China's largest homegrown automaker Chery Automobile Co Ltd is in talks with Fuji Heavy Industries Ltd about a possible joint venture to produce Fuji Heavy's Subaru brand vehicles in China, according to insiders of the two parties.

"The companies are close to signing an initial framework agreement to form a venture at Chery's new manufacturing base in Dalian, Liaoning province," said an insider from Chery. He told China Daily that the final discussions on the major terms and conditions for the joint venture are running smoothly.

Fuji Heavy, Subaru's parent company, also said at the end of last year that it plans to build a 30 billion yen ($369 million) plant with Chery in China, with an initial annual capacity of 50,000 vehicles, according to reports in the Japanese newspaper Nikkei Business Daily.

The annual capacity will eventually rise to 150,000 units, said the newspaper, citing executives from Fuji Heavy.

However, Jin Yibo, a spokesman for Chery, refused to confirm the deal on Wednesday, saying that the company "cannot provide any information".

If the final deal is signed, the venture will require approval from the Chinese government.

Analysts said that the deal will make China - the world's largest automobile market - the second overseas manufacturing base for Subaru, and greatly spur the Japanese brand's sales in the country. At present, the Japanese automaker has one production base in the United States - the only one outside its home country.

In 2010, Subaru sold 57,000 vehicles in China, signaling year-on-year growth of 62.9 percent from 2009. The robust growth was mainly driven by Subaru's flagship sport utility vehicle (SUV) family. The SUV segment has become the most popular model for Chinese consumers in the past two years, topping the overall market in terms of growth rate.

Analysts also said that the deal will give Chery a golden opportunity to upgrade its product lineup and brand image, both in China and in the international market.

Chery currently holds a more than 30 percent share of China's low-end vehicle market and has previously made several unsuccessful attempts to upgrade through cooperation with foreign players. In the past five years it has seen failed partnerships with Chrysler Group and Fiat SpA.

At present, the automaker, based in Wuhu, Anhui province, is the only player among China's three major homegrown brands (Chery, Geely Automobile Holdings and BYD Automobile Co Ltd) without a relationship with a major foreign automaker.

Despite being the biggest vehicle exporter in China - with most of its products going to emerging market countries in Southeast Asia, the Middle East, South America and Africa - Chery is in urgent need of a higher-end brand image in the global market.

The company said last month that it aims to increase exports by more than 30 percent year-on-year to 120,000 units in 2011.