The report, which cites people familiar with the matter, said the deal would allow Tesla to build facilities in Shanghai's Lingang development zone. An official announcement could come as soon as this week, but details are still being finalized and the timing could change, the report said.
Tesla did not immediately respond to CNBC's request for comment.
Hong-Kong traded Tencent, a company best known for its WeChat messaging app, disclosed in a Tuesday filing that it's taken a 5 percent stake in Tesla for $1.78 billion. The investment follows Tencent's new stake in taxi-hailing app Didi Chuxing, which can be accessed through WeChat.
This is not the first time Tesla has been linked to a factory opening in China. Earlier this year, a local Chinese newspaper — citing multiple sources — reported that Tesla was planning to build a factory in the Guangdong province of the country. Tesla denied the report.
— CNBC's Evelyn Cheng contributed to this report.