HONG KONG/BEIJING (Reuters) - Chinese state-owned Sinochem and ChemChina are in merger talks to create the world’s biggest industrial chemicals firm, to be headed by Sinochem chief Ning Gaoning, four people with knowledge of the negotiations said.

The company logo of China National Chemical Corp, or ChemChina, is seen at its headquarters in Beijing, China February 3, 2017. REUTERS/Thomas Peter

A deal could be announced by the end of the year, the people said, potentially just months after ChemChina completes its own $43 billion purchase of Switzerland's Syngenta SYNN.S, China's biggest overseas deal to date.

A consolidation of Sinochem and ChemChina would be worth around $120 billion, one of the people said, topping companies like industrial chemicals giant BASF BASFn.DE.

Talks to create a Chinese chemicals powerhouse were first reported last year, but were dismissed by both companies as rumor.

Sinochem 600500.SS and China National Chemicals Corp, as ChemChina is officially known, did not immediately respond to requests for comment on Tuesday. A Syngenta spokesperson said the company was not aware of any talks.

The two companies have accelerated negotiations after regulators last month cleared ChemChina’s acquisition of Syngenta, the people said. With the approval also of over 80 percent of Syngenta shareholders bringing completion of that deal nearer, focus has shifted to creating a Chinese powerhouse.

Beijing sees a Sinochem/ChemChina deal as a blueprint for streamlining and consolidating its sprawling, debt-heavy state-owned enterprises, the people said, leaving fewer, but more powerful, national champions.

"This is the priority now for both companies. The message from the top to the managers is very clear: don't be distracted by anything else," one of the people said, adding that the focus on this deal accounted in part for Sinochem recently ditching a plan to invest in Noble Group NOBG.SI, a loss-making commodity trader.

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POLITICS

A deal is not yet final, and China’s 19th Communist Party Congress later this year leaves room for some political uncertainty.

The expected retirement of ChemChina chief Ren Jianxin in January may speed up the process, one of the people said, to allow for a handover period.

Ren, known for bold deals including Syngenta and the purchase of Italian tyremaker Pirelli, has spent over a decade and billions of dollars expanding ChemChina, founding a popular noodle chain along the way. [reut.rs/2qKfkWd]

He may, though, have irked the authorities with his chutzpah in forging ahead with high-profile deals, another of those with knowledge of the discussions said. Ning, who made a name for himself as head of state-owned food processing group Cofco, is seen as politically well connected.

“The magnitude of the Syngenta deal means Beijing wants to make sure it’s securely managed,” said a person from the oil and gas industry.

While the ambitious Syngenta takeover brought China a portfolio of top-tier chemicals and patent-protected seeds to improve agricultural output, it also leaves ChemChina with hefty debt.

ChemChina last year arranged $32.9 billion in bridge loans with more than 20 Chinese, European and Asian lenders - giving it a level of gearing that investors and analysts think is too high.

QUESTIONS AHEAD

Combining Sinochem and an enlarged ChemChina would put the group among the world leaders across the competitive chemicals, fertilizer and oil industries - a giant overseas and a major challenger domestically to Sinopec 0386.HK and PetroChina 0857.HK.

Sinochem is larger than ChemChina, but needs a long-term partner to expand globally market from its roots as an oil and chemical trader.

Sinochem’s growth in its energy business has stagnated, with more competition at home in trading from companies including Unipec and Chinaoil, while its overseas oil and gas assets have struggled amid prolonged weaker oil prices.

Regulators may yet prove an obstacle.

During the European Commission approval process for the ChemChina/Syngenta deal, both companies indicated they were not imminently pursuing a deal with Sinochem, a separate source said at the time.