The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Hudson Lockett

HONG KONG, March 3 (Reuters Breakingviews) - If imitation is truly the sincerest form of flattery, one of Wall Street's biggest firms may soon be blushing. Beijing is planning to merge China International Capital Corp 601995.SS with broker China Galaxy Securities 601881.SS, Reuters reported last week, citing sources. The two denied it, but the tie-up - the latest attempt to consolidate the overcrowded industry - would have more logic than previous state-led deals. It would also mean CICC following the path of its co-founder, Morgan Stanley MS.N.

The U.S. bank, now run by Ted Pick, created CICC in 1995 as a joint venture with China Construction Bank 601939.SS. That was two years before the U.S. financial institution agreed to join forces with brokerage Dean Witter, Discover. The earnings diversification and access to a broader pool of investing clients - enhanced over the years by acquiring Citi's C.N brokerage business and E*Trade - is one reason why Morgan Stanley trades at a premium to arch-rival Goldman Sachs GS.N.

A CICC-China Galaxy combo would create China's third-largest brokerage with $190 billion in assets and could expect to emulate some of those business benefits. That makes it a different proposition to last year's merger of Guotai Junan Securities 601211.SS and Haitong Securities 600837.SS, which was commonly understood to effectively be a state-mandated bailout.

Not that CICC is sitting pretty. In recent years, regulators throttled the flow of listings in China’s onshore markets as well as in Hong Kong, kneecapping the firm's bread-and-butter business. Its earnings are likely to have fallen 13% last year, analysts polled by LSEG reckon; China Galaxy's are forecast to rise 28%.

The diverging fortunes have flipped the script on how a deal might work. Citi analysts were already touting the tie-up a year ago, favouring CICC to be in charge courtesy of its bigger market capitalisation. That has since fallen to 129 billion yuan ($17.7 billion), putting 147 billion yuan China Galaxy into the driver's seat, they point out - just as Dean Witter was 28 years ago.

A deal would ostensibly be part of China’s stated goal to produce two to three globally competitive investment banks and 10 leading institutions in the securities sector by 2035. CICC’s pedigree suggests its successor entity would be expected to perform on the world stage against the likes of Goldman and Morgan Stanley.

Of course, a single deal will not immediately produce such a champion, especially when Beijing’s ambitions lack detail. Independent of that, the standalone benefits of creating a Chinese version of Morgan Stanley makes it worth a shot.

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CONTEXT NEWS

State-run investment bank CICC - or China International Capital Corp - is set to merge with broker China Galaxy Securities to create the country’s third-largest brokerage with combined assets of $193 billion, Reuters reported on February 26, citing sources.

Both stocks posted double-digit gains in Hong Kong on the report before partly reversing course the following day, after the companies denied any consolidation plans from their top government shareholder Central Huijin Investment.

China’s securities regulator announced plans a year ago to develop 10 leading firms and two to three internationally competitive investment banks via mergers, acquisitions and restructuring by 2035.

(Editing by Antony Currie and Ujjaini Dutta)

((For previous columns by the author, Reuters customers can click on LOCKETT/ hudson.lockett@thomsonreuters.com))