MTU Cooltech Power Systems, under a 50-50 JV deal, will make the sets and power them with MTU Series 1600, 2000 and 4000 engines.
The joint venture wll target applications including but not limited to hospitals, airports, mining, semiconductors, telecoms and data centre market.
The move was due in part to the Chinese government recently announcing the New Infrastructure development programme created to boost the digital transformation of the country's economy.
Production of generator sets equipped with MTU engines will begin by the end of the year, the JV said.
"We pursue our growth strategy for diesel systems in China and move further towards becoming a provider of integrated power solutions in this strategically important market," MTU Greater China, Rolls-Royce Power Systems president Tobias Ostermaier said.
Rolls-Royce and Shanghai Cooltech Power have had a partnership since 2013, with the latter being one of the biggest customers of the Power Systems business unit.
Rolls-Royce has been producing MTU engines in China since 2006 and has formed other joint ventures with Chinese manufacturers.