• Combination will create China’s third biggest shipbuilding group

China’s two biggest state-owned shipping companies plan to merge 11 shipbuilding yards into a single entity in one of the industry’s biggest consolidation moves yet as ship orders hit record lows, according to people familiar with the matter.

If it goes ahead, the merger of the shipyards of China Ocean Shipping (Group) Co., or Cosco Group, and China Shipping Group Co. is expected to be announced by early next year, the people said.

The two companies had already combined their fleets and port operations last year to create China Cosco Holdings, the world’s fourth biggest container operator in terms of capacity. The combination of their shipbuilding arms will create China’s third biggest shipbuilding group.Cosco owns six yards and China Shipping Group owns five. Cosco also operates two joint-venture yards with Japan’s Kawasaki Heavy Industries Ltd.

It is unknown whether the joint ventures will be part of the merger. Kawasaki said Monday that it may exit the shipbuilding business.

Down payments for new vessels used to be 30%, the official said. But in the past 18 months, the share shrank to 10%, he said, adding to the challenges that shipbuilders face.

Chinese shipbuilding industry officials said the two companies have a combined workforce of more than 25,000. Job losses in mergers of state companies are frowned upon in China.

People involved in the process said the shipbuilding merger would be used as a model for a wider plan to merge the country’s two biggest shipbuilders— China Shipbuilding Corp. and China Shipbuilding Industry Co., which own dozens of yards along China’s Pacific coastline.

China builds roughly half of the world’s new ships. But the once-thriving industry has been shrinking steadily for the past four years on tumbling orders and Beijing’s evolving strategy to stop subsidizing unprofitable enterprises.

About three-quarters of the 1,800 shipyards China had in 2009 have closed “as Beijing stopped subsidizing the sector,” said George Xiradakis, chief executive of Athens-based XRTC maritime consultancy and an adviser to China Development Bank, one of China’s biggest shipping financiers.

“The word from Beijing is that it will continue to finance with strict performance criteria a handful of state shipbuilding conglomerates which are pushed to consolidate,” he said, “but the rest are left on their own.”

The shipbuilding consolidation is part of China’s strategy to get more of its growth from services and consumption than heavy industry and construction.

Chinese yards got a total of 127 orders this year amounting to $3 billion, compared with 621 orders worth $26.5 billion last year and 992 orders worth $33.7 billion in 2014.

“The Cosco-China Shipping yard merger will be supported from shipbuilding and repairs for the fleets of the two conglomerates that have already merged their shipping operations,” said Mr. Xiradakis. “But orders must also come from the outside if the yard merger is to be sustainable,” he said.

At least 20 medium and large private shipyards closed in China last year, according to the industry executives, with total job losses of around 40,000.