This comes as Peugeot struggles in its home market, warning last month its core car making business would barely make money this year and announcing 6,000 layoffs across Europe, including 1,000 manufacturing jobs and 2,500 contractor positions.

"The European situation is a bit uncertain for the time being," Peugeot's Chief Executive Philippe Varin told reporters on the sidelines of a launch ceremony for the venture in Shenzhen, a booming city in China's south. 

"This makes a point that to be in China as a big player, it is very important for us because there is growth. There is a win-win spirit with our partners," said Varin, who is also the chairman of the managing board of PSA Peugeot Citroen. 

With an initial investment of 8.4 billion yuan ($1.3 billion), the 50-50 Changan PSA Automobiles Co. Ltd. venture said it will set up a research and development centre to develop its own brand, as well as the Peugeot and Changan brands. 

The joint venture is allowed to set up an overseas production base and operate the export of multiple brands, but it will focus on China. 

"There is a very rapid growth of the Chinese market so all of our efforts are going to be focused on taking a strong Chinese position," said Gregoire Olivier, CEO Asia operations of PSA. 

Changan PSA will import DS4 and DS5 vehicles, the latest in its Citroen DS line that made its debut at the 2011 Shanghai autoshow, for sale in the first half of 2012. It will import the DS3 in the second half of next year, said Ying Zhanwang, Changan PSA's vice president.

Changan is China's No. 4 automaker and the state-owned parent of Chongqing Changan Automobile Co. It is close to China's No.3 carmaker, Dongfeng Motor that produces its Peugeot 408 and Citroen C5 sedans, but it is trailing General Motors and Volkswagen, which are performing strongly in China.  

While car sales in the mainland climbed only 1.4 percent in October, causing the growth in the first 10 months to ease to 5.9 percent, the Chinese premium market remains a bright spot and rose 33.5 percent in the first half of 2011, Changan PSA said.

Car sales grew 33 percent in China in 2010 but are expected to grow at a much slower pace in 2011 after Beijing axed subsidies on small cars and raised the eligibility for fuel-saving incentives. 

Olivier said China's car sales may rise 4-5 percent this year and 6-7 percent in 2012.  

"But the long-term prospect is excellent. Don't believe what you have seen in Shanghai and Beijing," he said, adding there were a lot of opportunities in small cities with 1-2 million people. 

"These small cities have entrepreneurs who like distinctive cars, like DS cars," Olivier said.  

PSA's goal for the long term is to take about an 8 percent share of the China market, he said. 

Changan PSA aims to start mass production of the DS5 in the joint venture in 2013 and its environmentally friendly dual mode model later. It did not give a timetable. 

The venture company will have initial annual production capacity of 200,000 vehicles and engines and will gradually expand according to market demand.

Covering an area of about 1.3 million square meters, it will have two vehicle plants and one engine plant. A research and development center with investment of 500 million yuan is being built simultaneously.           

The partner companies said the joint venture will hire about 2,000 employees in China by end-2012, even as Peugeot union officials said on Nov. 15 the company was preparing plans to cut 5,000 jobs in France.

Varin said on Sunday "it is clear" the company "must make savings because the European markets are under pressure", even though French President Nicolas Sarkozy said on Thursday Peugeot had pledged not to go ahead with the plan to lay off workers in France.