The two companies will invest about 300m yen (£1.7m) in establishing the venture, which is expected to employ some 100 engineers initially and up to 500 people in three years' time, according to Nihon Keizai Shimbun.
The first handsets are expected to roll off the production line in 2003, the newspaper said.
"We have been talking about the Chinese market, although we have not made any decisions at present," said NEC spokeswoman Akiko Shikimori, who added that a joint venture is one of a number of possibilities on the table.
Any work NEC and Matsushita do together in China, which is already one of the world's largest second-generation (2G) mobile phone markets, would be an extension of a 3G handset development alliance announced earlier this year.
The companies are Japan's top two manufacturers of 2G handsets and the only firms in the world with commercial 3G handsets in the hands of consumers. China has yet to award 3G licences.
Nokia, the world's largest manufacturer of mobile phone handsets, recently announced provisional plans to establish a research and development centre in China that will focus on 3G technologies. Several other companies have also announced deals with Chinese companies and research organisations.
However, definite details of the country's 3G rollout have not been released and it is unclear which of the three 3G standards carriers in China will adopt.
The commercial launch of services using the homegrown Time-Division Synchronous Code-Division Multiple Access (TD-SCDMA) standard is expected in the middle of 2002, said a Siemens representative.
However, NEC has no plans to manufacture TD-SCDMA handsets, according to Shikimori, who added that the company remains confident that Wideband CDMA - the system in service with NTT DoCoMo in Japan - will be used by at least one carrier in China.