PSA Peugeot Citroen, France's largest carmaker, and China Changan Automotive Group Co. signed an agreement to set up a venture in China to tap rising demand for vehicles in the world's biggest auto market.

The venture will make "environmentally friendly" light commercial vehicles and passenger vehicles, Changan said in a statement today. The companies are still working out details of the venture, the statement said.

Peugeot is adding to an existing Chinese partnership with Dongfeng Motor Group Co. as foreign carmakers expand in China, which surpassed the U.S. in vehicle sales for the first time last year. Volkswagen AG said April 26 it will increase its 4 billion-euro ($5.1 billion) investment program in China by 1.6 billion euros.

The new Peugeot-Changan partnership won't compete directly with the Dongfeng venture, which assembles models including the 308, 408 and Citroen C5, today's statement said.

Peugeot is also planning a third factory with Dongfeng as their two plants in Wuhan, eastern China, approach capacity limits, said Philippe Varin, the Paris-based carmaker's chief executive officer.

Changan aims to sell more than 2.6 million vehicles by 2012. SAIC Motor Corp., China's biggest domestic automaker, sold 2.71 million vehicles last year.

Peugeot's Chinese operations are dwarfed by market leaders General Motors Co. and Volkswagen, which claim 16 percent and 12 percent of China's auto sales, respectively.