China Ordnance Equipment Group, Chang’an’s parent, will transfer a stake in Chang’an Auto to AVIC in exchange for AVIC’s ownership share of minivan maker Harbin Hafei Automobile Industry Group, Changhe Automobile, engine maker Dongan Power, Changhe Suzuki and Dongan Mitsubishi. AVIC will hold a 23% stake in the new Chang’an Group.

The deal—the biggest merger between China’s state-owned auto companies— is further evidence that the central government is moving ahead with plans to consolidate the industry and create several globally competitive car makers.

After the deal, new Chang’an Group will be capable of producing 2.2 million vehicles at 21 car factories nationwide, giving it the opportunity to challenge the nation’s biggest car maker, Shanghai-based SAIC Motor Corp. SAIC is forecast to sell more than 2 million vehicles this year. “Chang’an aims to boost sales to more than 2.6 million units by 2012 and to 5 million by 2020,” said Xu Bin, general manager of COEGC.

China wants to cut the number of its major auto groups to 10 or fewer from the existing 14 over the next three years through mergers and acquisitions. The state aims to form two to three auto giants with annual production capacities of at least 2 million units and four to five companies with capacities above 1 million. (Earlier post.)