Cadillac will begin building the new XTS in China.

General Motors is preparing to build three new Cadillac models in China – including its all-new XTS flagship — with the help of its principal Chinese partner, Shanghai Automotive Industry Corp. or SAIC.

The cars are expected to compete for high-end Chinese buyers, particularly in major Chinese cities such as Beijing and Shanghai, who have already shown a willingness to spend lavishly on European luxury cars despite some of the world’s most expensive licensing fees.

The new Cadillac XTS, which replaces the old STS, will be the first of the three Cadillac models to go into production in China.  It will target such competitors as the BMW 7-Series and Mercedes-Benz S-Class.  Demand for premium luxury models has been especially strong among wealthy Chinese buyers and communist party functionaries – particularly products that offer roomy and well-equipped back seats, like the XTS.

The new Cadillac ATS.

GM also expects to eventually build at least two other Cadillacs in China, including the new compact ATS – a BMW 3-Series contender — and the Cadillac CTS, which GM currently exports to China from its assembly plant in Lansing, Michigan.

The decision to build Cadillac’s in China is a response to the booming Asian nation’s decision to change some of the rules on auto imports last year – that, in turn, a response to increased tariffs on Chinese-made tires which, the Obama Administration ruled, were being dumped on the U.S. market.

China sharply increased tariffs on a select group of American-made luxury products, including not only Cadillacs but also models produced in the States by BMW and Mercedes-Benz.

Those two makers, as well as Audi and other upscale manufacturers, are all expanding capacity in China to meet rising demand for luxury vehicles.  Being able to compete with German carmakers in a market such as China would be a major step in GM’s efforts to re-establish Cadillac as a genuine global luxury brand, observers have noted.

But there are concerns Cadillac might be late to the party.  Overall, Chinese car sales have been slipping in recent months, especially in the upscale market segments.  Mercedes recently cut prices on some S-Class models by as much as 25% to shore up demand.  While that’s the extreme, according to an analysis by Deutsche Bank, the luxury market is clearly struggling more than it has before.  The only question is whether this is a temporary or long-term setback.

Paul A. Eisenstein contributed to this report.