BEIJING -- German auto giant Daimler AG has signed an agreement with its Chinese partner Beijing Auto to invest 2 billion euros into their joint venture in the Chinese capital, allowing Mercedes to expand production of compact luxury SUVs, said the Chinese company on Wednesday.

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Under the strategic framework agreement signed on Tuesday, Beijing Benz Automotive Co, the joint venture, will use the new investment to manufacture compact cars and Mercedes-Benz GLKs, said a spokesman with the Beijing Automotive Industry Corporation (BAIC).

The money will also be used to set up an engine plant with a production capacity of 250,000 units per year and a research and development center.

China is a very promising market for Benz's luxury compact cars and one in five is expected to be sold in China by 2020, according to the German company.