The deal was announced as French Prime Minister Jean-Marc Ayrault arrived in China for a five-day visit expected to be dominated by trade issues.
Analysts said it was probably a move by the Renault-Nissan alliance to secure its position in China, where Japanese brands often fall victim to fiery nationalism when ties between Beijing and Tokyo turn sour.
Renault and Dongfeng will each have a 50 percent share in the new company, the Chinese firm said, adding the government had approved the deal and "the production of 150,000 multiple purpose vehicles and engines per year".
The two will invest a total of 7.8 billion yuan ($1.3 billion) in the joint venture, which will be based in Wuhan in the central province of Hubei, said Dongfeng, China's second-biggest carmaker.
Renault is Nissan's largest shareholder, with a 43.4 percent stake, while Japan's number two automaker has around 15 percent of the French company.
"Given the prospects for Japanese brands in China, Renault and Nissan probably want to have two brands here to consolidate their foothold," John Zeng, an analyst with Shanghai-based consultant firm LMC Automotive, told AFP.
"The Nissan brand has easily been affected when China-Japan relations have had problems," he said.
Nissan, which operates in China in a partnership with Dongfeng, depends on the country for about one-quarter of its global sales.
It took a huge hit last year when a Tokyo-Beijing territorial dispute set off sometimes violent demonstrations in China and a consumer boycott of Japanese brands.
It has since been trying to claw its way back to a previous 7.7 percent market share.
The project with Renault has been a decade in the making, after a previous unsuccessful joint venture by the French firm in China.
Renault began operations with China Space Sanjiang Group in 1993 to produce the Traffic minibus, but production stopped in 2003. Dongfeng and Renault have
been in talks since then.
The company has so far trailed rivals such as US auto giant General Motors and Volkswagen of Germany, which have both been running multiple joint ventures in China for decades.
General Motors sold 2.81 million units in China last year, up 11 percent from 2011, while Volkswagen's sales jumped 25 percent on year to 2.84 million
Auto sales in China rose 4.3 percent year-on-year in 2012 to 19.31 million units, hit by limits on numbers imposed by some cities to ease traffic congestion and tackle pollution.
But a report by the consultancy McKinsey predicted last year that the country's passenger car market would grow eight percent annually to 22 million units by 2020.
Dongfeng has previously been reported to be negotiating to buy a stake in another French car firm, PSA Peugeot Citroen, with which it already has a joint venture.
"Through entering into the joint venture contract with Renault SA and the establishment of the joint venture, the overall competitiveness, brand value and technical strength and profitability of (Dongfeng) will be enhanced," the Chinese firm said.
Each company will appoint four of the eight directors of the joint venture which aims to sell 150,000 cars a year, with production to be increased "according to market needs", Dongfeng said, including vehicles using alternative energy.