In a sign of the changing fortunes of the world's top two economies, China's biggest auto maker, SAIC Motor Corp., is negotiating to acquire a stake of about 1% in General Motors Co. worth about $500 million, according to a person familiar with the matter.

The U.S. auto maker also is prepared to sell more than $1 billion worth of shares to sovereign wealth funds in the Middle East and Asia. Combined, the sales would give foreign investors roughly 16% of the shares to be sold next week under an initial public offering of stock, and give them a stake of some 4% in the Detroit auto maker. GM declined to comment on the investment talks.

The issue of overseas investors buying GM shares in the company's IPO has been a sensitive one for the U.S. government, which plans to reduce its 61% stake in the auto maker to about 35% through the IPO.

The investment in GM by government-owned SAIC would be the latest in string of deals giving Chinese companies stakes in big-name Western companies. In 2007, sovereign wealth fund China Investment Corp. took an initial 9.9% stake in securities firm Morgan Stanley. Pacific Century Motors recently took over GM's former steering unit, now called Nexteer, and Shougang Corp. bought Delphi Corp.'s brake unit.

The U.S. Treasury has to walk a fine line. Attracting foreign investors will be a key to pulling off a listing of this size. But the Treasury has also had to weigh the possible political outcry if investors abroad are allowed to acquire a significant stake in GM, after U.S. taxpayers spent $50 billion to carry the company through bankruptcy reorganization, people familiar with the matter have said. The Canadian government also helped bail out GM, which has operations in Ontario.

GM's IPO allocations likely will include three or four sovereign wealth funds, in addition to SAIC, according to a person familiar with the situation.

The investments would represent the latest in a wave of capital infusions into U.S. companies that first gained momentum in 2007, when the credit crisis prompted U.S. banks and other companies to search abroad for capital. China Investment followed up its 2007 investment in Morgan Stanley with a $1.2 billion investment in 2009, according to Dealogic. The same fund also paid $3 billion in 2007 for a 10% stake in Blackstone Group LP.

Sovereign wealth funds, in particular, are attractive investors to GM and its bankers because they tend to hold investments long-term, providing stability for the company.

GM executives are in the midst of a "road show" to pitch the IPO to investors. The tour won't stop in the Middle East or Asia, but GM has worked to court investors in both places. GM Chief Executive Officer Daniel Akerson last month went to the Middle East to speak to potential investors, and Vice Chairman Stephen Girsky recently went to Korea, say people familiar with the situation. A final decision on the SAIC stake could come within a few days.

SAIC and GM are partners in a Chinese joint venture, started in 1997, that makes Buick, Cadillac and Chevrolet vehicles. The partnership has earned GM hundreds of millions of dollars over the years and has made GM the largest foreign auto maker in China. GM and SAIC also have a joint venture in India.

Years ago, SAIC was the junior partner with GM, relying on the U.S. company for technology, engineering and capital. But amid GM's troubles, SAIC has become a bigger player. In the course of GM's restructuring, the American company sold part of its stake in the partnership, giving SAIC a 51% stake.

China, with the world's biggest and fastest-growing auto market, is now a key source of strength for GM and has been central in its pitch to investors for the IPO. GM is now the top-selling foreign brand in China, having overtaken Volkswagen AG. This year, for the first time, GM is selling more vehicles in China than in the U.S.

GM, in the IPO, will seek to sell $10 billion in common shares and $3 billion in preferred shares. The U.S. Treasury would sell about $7 billion of shares assuming a $27.50 IPO price. A United Auto Workers trust, which pays for retiree health care, would sell $2 billion of its shares, while Canada and Ontario would offload around $1 billion of shares, assuming the same price.

GM set a target of between $26 and $29 a share for its IPO. High investor demand could drive that initial price to $30 a share or slightly above. Investors are sending signals to deal underwriters that they would pay a higher price for shares than the target, people involved in the offering said.

If that happens, it would be good news for the Obama administration, which could be criticized for pricing the deal too low—thus shortchanging taxpayers—if GM's stock price rises sharply after the offering.

GM plans to price the IPO Wednesday, and shares would go on sale the following day, according to people familiar with its plans.

The auto maker this week reported a $2 billion profit for the third quarter and said it is on track for its first profitable year since 2004, bolstering the company's prospects on Wall Street.

The expected stake by SAIC in GM follows a flurry of moves in recent months by the two companies to deepen their ties.

GM and SAIC have begun developing cars together that are sold not just in China but elsewhere in the world and earlier this month signed an agreement to try to deepen their technical cooperation and further integrate the Chinese auto maker into GM's global product-development system.

The agreement is intended to allow the two companies to share technology and knowhow more widely to support the joint development of electric cars and components. It is also aimed at creating a greater role for their joint research and technical center in Shanghai in the development of future vehicles and engines.

Last week, GM also disclosed that it plans to increase its stake in the Wuling microvan joint venture it owns with SAIC to 44%, part of efforts to integrate the Chinese operation more into the U.S. company's global business. The Detroit auto maker said in a U.S. regulatory filing that it has entered into an agreement to purchase an additional 10% interest in SAIC GM Wuling Automobile Co. for $51 million in cash from a third joint-venture partner, Wuling Group.