The deal involves setting up a greenfield brewery with the Ningxia Nongken Enterprise Group in the Ningxia Autonomous Region. The brewery will have a capacity of up to 1 million hectilitres when completed at the end of the year.
Carlsberg will own 70 per cent of the joint venture.
The company is now involved in 20 breweries, primarily in western China, an area where other international brewers have not yet made much impact.
This region, with more than 100 million inhabitants, constitutes about one third of China, yet beer consumption in only at an annual 18 litres per capita, according to Carlsberg, below the national average of 23 litres per year.
The Danish brewer sees this low consumption as a strong growth opportunity.
"This combined with the central government's desire to develop the western part of China both financially and in all other areas and to catch up with the rest of China, means that the potential for increase of beer consumption in this region is very significant," said Jesper Madsen, senior vice president for Carlsberg in Asia.
The local Xixia beer brand will be part of the portfolio of the new joint venture.
"Nongken will bring into the joint venture a considerable experience in producing and distributing beer in the local market," said Carlsberg in a statement.
Last year the beverage group said it would shut around half its European breweries within a decade to focus on the growing beer markets in Asia. China is already the world's biggest producer of beer with output of some 24 million tonnes per year. Along with Russia, it is expected to make up half of the global beer market by 2010.