In the 1970s, the leaders of China's People's Liberation Army were concerned about the Soviet threat, and requested an improved main battle tank (MBT) to replace the old and obsolete Type 59 tank. Thus in 1980, Norinco was formed, and the Inner Mongolia First Machine Group Corporation was tasked with developing a series of new tanks.
A joint development deal was signed with Pakistan in January 1990. Initial Chinese-built prototypes were tested in Pakistan in August 1991. Pakistan completed its manufacturing plant at Taxila in 1992. Pakistan spent more than US$20 million over the next eight years on the co-development of a model suitable for its needs and on creating a capability to manufacture it locally. The Director General of Heavy Industries Taxila (HIT) Lt Gen Hamid Javaid and Major General Muhammad Asad supervised the project. The design team modified the tank to accept a foreign-built engine. Several different prototypes were evaluated.
In light of high ambient temperatures and the fine sand or dust that would be encountered in operational areas such as the deserts of southern Pakistan, the development of high performance cooling and air filtering systems was emphasised during the planning stage of the project. Implementation of a hydro-gas suspension system was considered but, after technical evaluation, it was found to be impractical due to various limitations such as problems with reliability and maintainability. Installation of the Renk 304 transmission was also considered but disregarded.
An early version was armed with a Chinese gun and fire-control system, and had a German-designed MTU-396 diesel engine which was built under licence in China. Another version was equipped with a more advanced Western Digital fire-control system and powered by a Perkins 1,200 hp (890 kW) Condor diesel engine (as in the British Challenger) and SESM ESM500 automatic transmission (as in the French Leclerc). This version was considered too expensive, and under-performed in the extreme heat of southern Pakistan. Finally, a version was tested with the compact Ukrainian 6TD-2 1,200 hp diesel engine. This configuration was chosen by Pakistan for the production version of the tank and came to be known as Al-Khalid. Ukraine also sold T-80UD tanks to Pakistan, which were powered by a similar engine.
The final tank design resulting from a decade of co-operative development was designated Type 90-IIM. The Chinese company Norinco showed the new Type 90-IIM during the March 2001 Abu Dhabi Defense Expo, under the export name MBT 2000. The version powered by the Ukrainian engine, intended for domestic production in Pakistan, was named Al-Khalid.
During the development period, Heavy Industries Taxila gained experience after building the Type 85-IIAP under Chinese licence and prepared to begin production of the Al-Khalid tank in 1999. A pilot batch of fifteen tanks was inducted into the 31st Cavalry Regiment of Pakistan’s Armoured Corps on 20 July 2001. Pakistan signed a contract with Ukraine's Malyshev Factory in May 2002 for the delivery of 315 KMDB 6TD-2 diesel engines over three years. An additional batch of Al-Khalid tanks was delivered on 23 September 2004. Pakistan planned to build a total of 600 Al-Khalid tanks for its armed forces.
In 2006 a US-based market and special research organisation reported findings showing that the Al-Khalid, along with two other MBTs, would account for nearly 45% of all new MBTs built until 2015.
In April 2002, it was reported that Malaysia was considering purchasing the Al-Khalid after evaluation by Malaysian military personnel, but Malaysia eventually backed out without stating any reasons.
The Saudi Arabian Army began conducting trials of the Al-Khalid's desert performance in April 2006, after expressing interest in purchasing a batch of the tanks 2 years earlier. No order for the tank was placed despite the symbolic naming of the tank after Khalid ibn al-Walid.
In May 2008, Lt. Gen Sarath Fonseka of the Sri Lanka Army held talks with his Pakistan Army counterparts regarding the sale of military equipment, weapons and ammunition. The supply of 22 Al-Khalid MBTs to the Sri Lanka Army was finalised during these talks in a deal worth over US$100 million.
Peru leased five VT-1A from China for trials in 2009. The Peruvian government had expressed interest in purchasing 80–120 units to complement the fleet of Soviet T-55 tanks in service with the Peruvian Army. Peru decided to buy MBT-2000 tanks. The deal was blocked as China did not obtain permission to re-sell some Ukrainian components (engine, transmission and Varta Active protection system).