The development of the Chinese automotive sector is continuing to gain momentum, with Europe's largest car manufacturer today announcing plans to build a new plant in Shanghai.

Volkswagen AG says it has agreed with Chinese partner Shanghai Automotive Industry to construct a new facility in order to help boost production capability and foster improved sales in the region.

Chief executive officer Bernd Pischetsrieder signed a contract confirming the sale in Ingolstadt, Germany, when Chinese Premier Wen Jiabao conducted a state visit.

The firm will also increase the stake it holds in its Shanghai Volkswagen joint venture, using a share issue of around €150 million to raise funds.

Mr Pischetsrieder told OTS newswire: "China is and remains the most important market for Volkswagen outside our homeland.'

According to Bloomberg the new plant will be capable of producing 150,000 vehicles per year, forming part of plans to ramp up production in the region as demand increases.

Volkswagen says it expects to produce more than 1.6 million vehicles per year in China by 2008, while demand is tipped to soar as the country's economy grows.