Chinese state-owned chemical companies Sinochem Group and ChemChina are in discussions about a possible merger to create a chemicals, fertiliser and oil giant with almost $100 billion in annual revenue, three sources familiar with the matter said.

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 authorised 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 spokesman 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.

Shares in the companies’ listed subsidiaries jumped on the news, with Sinochem International up 10 per cent for its biggest one-day rally in a year and Sinofert on track for its best daily gain since December.

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