Tesla Inc is taking another step toward making cars in China, after reportedly inking a preliminary deal with the Shanghai government to set up a plant in the coastal city.

The United States electric vehicle maker signed a preliminary investment proposal in May with the local authority, which could give Tesla the green light to build a factory in Shanghai's southeastern Lingang Area, Chinese financial media outlet Caixin reported on Thursday, citing insiders with knowledge of the matter.

In an emailed reply to China Daily on Friday, the Shanghai Municipal Commission of Economy and Informatization - the local industry and information regulator - said the government is highly supportive of innovation and the development of new energy cars, and that it is optimistic about Tesla's development globally, as well as in China.

"Tesla recognizes the favorable investment environment in Shanghai and its multiple advantages," the commission said.

"The Shanghai government has been in contact with Tesla. Both sides wish to join forces to promote the development of the new energy vehicle industry," it said.

Tesla declined to comment on the latest developments.

The report comes just days after Tesla registered a wholly owned subsidiary in Shanghai, focusing on electric vehicle-related research, spare parts, batteries and solar panel products.

The automaker currently imports all the cars it sells in China from the United States.

It already has other wholly owned companies registered in China that focus on sales, and research and development.

Having a China-based factory is definitely "one step forward" for Tesla, which could greatly increase its production capacity and make its offerings more affordable, said Jacob George, Asia-Pacific vice-president and general manager of JD Power, a global market research company specializing in the auto sector.

"With China being the largest electric vehicle market, having direct access to the market with affordable vehicles is a very attractive proposition for Tesla," he said.

A shortage of supply has long plagued Tesla and dragged on its bond rating and share price. According to George, having a Chinese plant will significantly increase its volume and scale, which the company needs to finally make its business profitable.

"They want to expand their global footprint anyway. A Chinese manufacturing base would give them the flexibility to do so if they have multiple plants," he said.