China Ocean Shipping (Group) Company (COSCO) and China Shipping Group are in talks over a possible merger, a person with direct knowledge of the matter said, as Beijing accelerates a drive to reform the bloated state-owned sector.

Beijing has promised to restructure many state-owned enterprises (SOEs) and streamline industries to improve their global competitiveness. As part of that plan, it merged its top two nuclear power firms, and top two train makers this year.

"The idea (of a possible merger) exists," said the source who spoke on condition of anonymity. "The matter is being discussed."

The listed units of the two state-owned companies, including COSCO's flagship China Cosco and China Shipping's China Shipping Development , halted trading in their shares from Aug. 10, adding that they were "planning major issues".

Chinese business magazine Caixin reported on its website late on Monday that the central government had urged the firms to draft a preliminary merger plan within three months, beginning from August, citing an unnamed COSCO executive.

The report said the firms would set up a five-member working group to consider the merger plan, with three members from China Shipping and two from COSCO. China Shipping's chairman, Xu Lirong, would head the team, it said.

Officials in the communications departments of both COSCO and China Shipping Group declined to comment.

In April, state media reported that Beijing would cut the number of big state firms to 40 through mergers. Speculation that shipping would be the next industry to see an SOE merger, particularly one between COSCO and China Shipping, has raged for months.

Like many other foreign shipping firms, COSCO and China Shipping Group have in recent years been squeezed sharply by a global glut of vessels that were ordered before the financial crisis, which have weighed heavily on freight rates.

In July, China COSCO said it would post a first-half profit of 1.9 billion yuan, after suffering a loss last year, aided by government subsidies, higher revenue and lower costs.

Citi analyst Vivian Tao said in June that a combined COSCO-China Shipping would be the world's fourth largest container shipping company with a roughly 8.1 percent share, but would still lag behind the top three - APM Maersk, Mediterranean Shipping Company and CMA CGM - who oversee almost 40 percent of the market. (Source: Reuters)