By Julie Zhu

Feb 26 (Reuters) - State-owned China International Capital Corp (CICC) 3908.HK is set to merge with its peer China Galaxy Securities 6881.HK, said five sources, in a deal that would create the country’s third-largest brokerage with $193 billion in assets.

A combination of CICC 601995.SS and Galaxy 601881.SS, 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.

Both brokers, which count sovereign wealth fund China Investment Corporation $(CIC.UK)$ 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 601688.SS, 6886.HK 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.

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 GS.N and Morgan Stanley MS.N that have in recent years taken full control of their China businesses and are eying 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.

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

CICC and Galaxy did not immediately respond to Reuters’ requests for comment. CIC declined to comment.

The State Council Information Office, which handles media requests for China's government, and the China Securities Regulatory Commission did not respond to faxed queries.

(Reporting by Julie Zhu in Hong Kong and Reuters Staff in Beijing; Editing by Sumeet Chatterjee and Muralikumar Anantharaman)

((sumeet.chatterjee@thomsonreuters.com; +852 3462 7757;))