Monday's move to merge the two units come as global automakers pursue alliances to respond better to the cost of switching to electric cars, tougher emission rules and autonomous driving.

Shares in Geely jumped as much as 11.5% to HK$15.28 on Tuesday.

Zhejiang Geely Holding Group [GEELY.UL], Geely Automobile's parent, bought Volvo Cars from Ford Motor Co in 2010.

Together with electric premium brand Polestar and Geely's new energy brand Geometry, the new company will have five brands, with products ranging from affordable sedans to luxury sports cars, marking the emergence of China's first global carmaker, analysts said.

"Strategically, the deal feels like – after years of deal-making – a first move by Chairman Li Shufu to consolidate his sprawling automotive empire, and to pay off some of the debt that had built up," analysts at Bernstein said in a note.

It remains unclear how much valuation would be added to Geely, a Hong Kong-listed, $16 billion company, by injecting Volvo assets. Geely's sales started to surge from 2015 as its products began incorporating Volvo technology.

Geely Automobile sold 1.36 million cars in 2019 and aims to sell 1.4 million cars this year. Volvo sold just over 700,000 cars last year.

Volvo and its parent group had been discussing an IPO to value the carmaker at between $16 billion and $30 billion before they dropped the listing plan in 2018, sources said.

Compared to Volvo's IPO plan, this proposal could better align Geely and Volvo's interests, Shi Ji, an analyst at Haitong International wrote in a note. Such a merger would help Volvo cross sell Geely cars worldwide as well as those made by sister brand Lynk & Co.

CAR COMBINATIONS

Volvo Cars and Geely will create a joint working group to prepare a proposal for their respective boards, the companies said in a statement on Monday.

The parent group, led by billionaire Li, has a number of other investments including a 9.7% stake in Daimler acquired in 2018, a 49.9% stake in Malaysia's Proton bought in 2017, and a majority stake in British sport car brand Lotus.

In October, Volvo Cars said it would merge its engine development and manufacturing assets with those of Geely, creating a division to supply Lotus, LEVC, Lynk and Proton, and also potential rivals with next-generation combustion and hybrid engines.

Among other car companies that are collaborating are Volkswagen and Ford, which said last year they would spend billions of dollars to jointly develop electric and self-driving vehicles, while FCA and PSA agreed a $50 billion merger to create the world's fourth-biggest automaker.

(Reporting by Yilei Sun in Beijing, Anushka Trivedi in Bengaluru; Editing by Keith Weir, Louise Heavens and Lincoln Feast.)