Hyundai Motor Co., South Korea's top carmaker, began construction of its fifth factory in China Tuesday to meet future demand for compact cars in the world's largest auto market.

Hyundai, which already started building its fourth plant in the Chinese city of Changzhou in April, said the fifth plant in the southwestern megacity of Chongqing will begin producing compact cars in 2017.

Along with its Chinese partner, Hyundai will spend $1 billion to build the plant in Chongqing, which will have an annual production capacity of 300,000 vehicles, the company said in a statement.

Hyundai Motor Vice Chairman Chung Eui-sun told a groundbreaking ceremony that the Chongqing plant would pave the way for Hyundai to increase sales in China's western regions.

"With the Chongqing plant, Hyundai Motor secures a bridgehead to make inroads into the western part of China," Chung said. 

Hyundai and its affiliate Kia Motors aim to expand their combined annual production capacity to 2.7 million vehicles in 2018 in China.

The new plants in Changzhou and Chongqing will produce "new small cars and small sport utility vehicles to combat the expansion of sales of Chinese brands and strengthen price competitiveness," the statement said.

By 2016, Hyundai will increase its dealership stores in China to 2,000 from about 1,700, it said.

Auto sales in China have been slowing as the world's second-largest economy grew 7.4 percent last year, marking its slowest pace in 24 years.

Chinese brands have also cut prices, making it difficult for Hyundai to sell vehicles.

In May, sales of passenger cars in China fell 0.4 percent on year to 1.9 million units, according to the China Association of Automobile Manufacturers.

In the first five months of the year, sales of Hyundai in China declined 3.5 percent on year to 450,084 units. (Yonhap)