By Julie Zhu

HONG KONG (Reuters) - State-owned China International Capital Corp (CICC) is set to merge with its peer China Galaxy Securities, said five sources, in a deal that would create the country's third-largest brokerage with $193 billion in assets.

A combination of CICC and Galaxy, which would mark the second mega merger in China's $1.6 trillion securities industry in a matter of months, has secured backing from Chinese authorities in recent weeks and could be announced in the coming weeks, said the sources.

Hong Kong and mainland-listed shares of CICC and Galaxy rallied on Wednesday after the Reuters report on the merger plan.

CICC and Galaxy, which count sovereign wealth fund China Investment Corporation (CIC) as their biggest shareholder and parent, seek to merge via a share swap, said two of the sources. Financial details of the planned transaction were not immediately known.

The combined entity, with 1.4 trillion yuan ($193 billion) in total assets, is set to surpass Huatai Securities to become China's third-largest brokerage. The planned deal will require regulatory and shareholder approvals, said the five sources, who have knowledge of the matter.

All the sources declined to be named as they were not authorised to speak to the media.

CICC and Galaxy said in separate filings late on Wednesday that neither of them had received any information from the government, regulators or controlling shareholder regarding the reported merger.

The State Council Information Office and the China Securities Regulatory Commission did not respond to Reuters' requests for comment. CIC declined to comment.

The merger would come amidst Beijing's efforts to establish large and competitive domestic investment banks as a counterweight to global banks such as Goldman Sachs and Morgan Stanley that have in recent years taken full control of their China businesses and are eyeing a bigger market share.

The merged entity is expected to be in a stronger position to navigate the challenging conditions at home at a time when the fragmented industry's prospects have been clouded by a stubbornly slowing economy, market weakness, and regulatory tightening in the financial sector.

If approved, it would be ranked after long-time industry leader Citic Securities and the combined Guotai Junan Securities-Haitong Securities in terms of total assets in the industry.

Shanghai-listed shares of CICC and Galaxy surged by their 10% daily limit on Wednesday, while the two brokerages' Hong Kong stocks advanced too, up 19% and 17% at the market close, respectively.

Story Continues

CONSOLIDATION DRIVE

Chinese authorities have increasingly emphasised the need for reform in the brokerage sector, introducing new directives to encourage mergers and acquisitions and restructuring in an industry where more than 140 Chinese and foreign firms compete.

The securities regulator announced in March last year its goal to develop about 10 leading institutions within about five years, including two to three internationally competitive investment banks and institutions by 2035.

Analysts have since anticipated an acceleration in the consolidation of China's brokerage industry, with a focus on firms backed by state shareholders.

In September, Shanghai-based Guotai Junan agreed to acquire its struggling local rival Haitong via a share swap, creating an industry heavyweight with $230 billion in assets. Both firms were controlled by companies managing state assets for the local government.

Before that transaction, six pairs of smaller brokerages had announced merger plans since the end of 2023. This includes that of Ping An Securities and Founder Securities, according to the official Shanghai Securities News.

Founded in 1995 by China Construction Bank, Singapore sovereign investment fund GIC and Morgan Stanley as China's first Sino-foreign investment bank, CICC has been prominent in helping many large Chinese companies, notably state-owned enterprises, list at home and in Hong Kong.

It has also been recognised for its strong performance in major cross-border M&As by Chinese firms and has long topped the league table for China-related M&A.

CICC in 2016 acquired smaller peer China Investment Securities for 16.7 billion yuan to bolster its then relatively small retail brokerage business, in a country where frequent trading by mom-and-pop investors has boosted revenues at brokerages.

Galaxy was set up in 2007 and offers a full range of financial services, from investment banking and wealth management to prime brokerage services in over 15 countries, as per its website.

As of June, Galaxy was ranked fourth by assets among local securities houses, while CICC was ninth, according to data compiled by financial information provider Hithink RoyalFlush.

(Reporting by Julie Zhu in Hong Kong and Reuters Staff in Beijing; additional reporting by Selena Li in Hong Kong; Editing by Sumeet Chatterjee, Muralikumar Anantharaman and Louise Heavens)