(Bloomberg) -- China is combining two of its largest state-backed brokerages to create a new behemoth as it seeks to consolidate the $1.7 trillion sector and build stronger investment banks to compete with overseas financial firms.

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Guotai Junan Securities Co. will merge with smaller rival Haitong Securities Co. through a share swap, according to statements from both companies on Thursday. The combination of the firms, both partly owned by Shanghai’s state assets administrator, will create a new entity with assets of 1.6 trillion yuan ($230 billion), topping Citic Securities Co. as the largest brokerage.

The merger is pending approval from the companies’ boards and shareholders, as well as regulatory authorities.

The deal comes a year after President Xi Jinping urged financial regulators to cultivate a few top-ranked investment banks to compete with Wall Street firms expanding in China. Shares of local brokerages surged on Friday morning.

The nation’s securities watchdog has also voiced its support for consolidation, with a goal of having two to three investment banks that can compete globally by 2035. China had about 145 securities firms at the end of 2023, with combined assets of 11.8 trillion yuan, according to official data.

“The combination is conducive to building a first-class investment bank and promoting the high-quality development of the industry,” according to the statements.

Profits Decline

The sector has been hampered by a slump in deals and sluggish capital markets as stocks flounder on weak economic growth. Profits have declined in the past few years, and the outlook for earnings remains bleak after industry heavyweights China International Capital Corp. and Citic Securities posted declines in first-half results.

Haitong, valued at HK$106 billion ($13.6 billion) in Hong Kong, reported a 75% decrease in profit for the first half, while its shares are down 12% on the year.

“The merger will potentially resolve” Haitong’s business concerns, Hua Chuang Securities said in a report. “The overall quality of the underlying assets is not very healthy, which also leads to the low valuation,” it said, adding that the merger may also lead to job cuts with the industry hit by a drought of companies going public.

Guotai Junan has about 15,000 employees, while Haitong Securities employs more than 13,600 including 1,645 at investment banking. Guotai Junan didn’t break down its business-line staffing, according to the firm’s 2023 annual report.