China plans to spend heavily on technology to help cities cope with headaches such as air pollution and traffic jams—and perhaps unruly mobs and outlaws. Silicon Valley companies are teaming up to seize the opportunity despite civil liberties issues, a trend that could raise the profile of players like Sensity Systems Inc.

The closely held company, whose investors include Cisco Systems Inc. and General Electric Co., on Friday is expected to announce a joint venture with a spinoff from China’s Academy of Sciences to help build...