The deal has been proposed by China’s central government as part of its efforts to slash the number of state-owned companies and create larger, more competitive global industry players, said the sources.

The sources asked not to be identified because they were not authorized to speak publicly about the matter.

Top management of the two firms held a meeting earlier this week to discuss a potential merger, said one source directly briefed on the matter.

“The government has given the mandate to let Sinochem lead in this potential merger with ChemChina,” said the source.

A second source familiar with the matter said both firms have started due diligence work looking into each other’s financial details and business segments.

When asked about a potential merger, a ChemChina spokesperson said: “There is no such thing.”

A Sinochem spokesperson said he was not aware of the discussions. China’s State-owned Assets Supervision and Administration Commission (SASAC), which oversees state-owned enterprises, did not comment when asked about the talks.

While still at an early stage, the talks come as China National Chemicals Corp, as ChemChina is officially known, finalizes a $43 billion takeover of Swiss pesticides and seed group Syngenta. That deal would be China’s largest-ever foreign investment.

Beijing may have initiated the talks to create a stronger, larger player to make it easier to absorb a world-class company like Syngenta, said the source directly briefed on the matter.

If approved, the ChemChina-Sinochem merger would be among the largest between two Chinese state-owned enterprises, following similar marriages that created shipping giant China Cosco Shipping Corp, train maker CNR-CSR and more recently, the tie-up between Baosteel Group and Wuhan Steel.

Combining the two companies, which make everything from refined oil products to latex gloves and insecticides, would propel it into the top echelons of the competitive global chemicals, fertilizer and oil industries.

Based on 2015 annual reports, revenues of the combined group would comfortably eclipse Germany’s BASF, the world’s largest maker of industrial chemicals by sales.

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The second source said a deal would benefit both companies: Sinochem’s upstream oil and gas assets could feed ChemChina’s nine refineries, Sinochem’s access to rubber trading would help ChemChina’s tire business, while Sinochem’s dominance in fertilizer markets would be a good fit for ChemChina’s agri-chemical business.

“Sinochem is generally light on assets, while ChemChina is a more of a manufacturer,” he said.