China’s government is poised to create a 1.8 trillion yuan (US$265 billion) industrial juggernaut by merging the country’s largest coal miner Shenhua Group with power producing giant China Guodian Corp, a move to bolster corporate performance, reduce over-capacity and improve management, according to two sources familiar with the plan. The Hong Kong-traded units of both companies said their state-owned parents are in the middle of handling “important matters,” according to public statements to the Hong Kong Stock Exchange, indicating that the deal is in the making, toeing the line of the Chinese government’s move to further consolidate state assets. China’s government wants to orchestrate the merger to help the combined business better able to navigate the volatilities in the coal and energy markets, said a senior executive of a state-owned company close to the State-owned Assets Supervision & Administration Commission (SASAC). The asset management agency’s deputy secretary general peng Huagang said last weekend that the state would push ahead with overhauls involving major coal mining and power-generating assets. China’s coal production and power generation industries exist as a zero-sum game. Electricity tariffs are set by China’s government, which puts the pressure on power producers to eke out profits amid surging coal prices, while a weak coal market would benefit power plants, but hurt miners. “A potential merger between Shenhua and Guodian will ease their worries about losses,” said Liu Qiaoyu, an analyst with Huatai Securities. “Shenhua could deploy professional managers and engineers to help Guodian better operate their coal mining assets.” Shenhua had 1.04 trillion yuan in total assets as of the end of April, including 83 gigawatts of power generating capacity. Guodian owned assets of 803 billion yuan at the end of 2016, with coal-mining businesses. Last month, it was reported that Beijing would drastically consolidate its major state-owned power generating businesses by reducing the number of the largest companies from eight to three. Overhaul of power plants is a must for China’s long-term benefit At that time, Huadian was speculated to be merged with China Guodian Group and China National Nuclear Corp. However, the sources familiar with the plans said SASAC had more than one available option in restructuring the coal mining and power producing assets. Coal still make up 70 per cent of the 1,800 GW of power producing capacity in China. Emissions obligations under global treaties is compelling the Chinese government to reduce coal’s maximum share to 1,100 GW by 2020, or 55 per cent of the country’s total power capacity. A merged entity between Shenhua and Guodian will potentially facilitate the closures of certain unprofitable coal plants, as the senior managers of the merged entities will likely be more susceptible to the government’s directives with layoffs or reassignments, said the state-owned company official. Trading in Shenhua’s shares were halted on the Shanghai stock exchange on Monday, after rising for two straight days last week to a two-year high of 22.29 yuan. On the Hong Kong exchange, the stock rose 2.7 per cent to HK$19.66. “As the Chinese consumer steps up the value curve, the incessant need for power will dominate the headlines and require new smart technology as well as adaptation of old world independent power producers to leverage new technologies and partner for a cleaner more efficient future,” said Brett McGonegal, chief executive of Capital Link International. “This will not be the first merger of large businesses aimed at augmenting output through scaled efficiencies and the need to stop cut throat competition obliterating necessary margins.”