HONG KONG (Reuters) - The merger of two state-backed brokerages in China to create a sector leader with $230 billion in assets is part of Beijing's drive to consolidate the $1.7-trillion industry amid challenging markets, and the move is set to gather pace, analysts said.

Shanghai-based Guotai Juan Securities is set to acquire its cross-town rival Haitong Securities via a share swap, the two companies said late on Thursday. The deal is subject to regulatory and shareholders' approval.

The combined entity, with 1.6 trillion yuan ($225.6 billion) in total assets, will replace Citic Securities as China's largest brokerage.

The consolidation of China's brokerage industry is expected to accelerate, with focus on firms backed by the state shareholder that are within the same system, Huatai Securities said in a research note.

Beijing has dialed up rhetoric about the need for reform in the brokerage sector, with new directives to encourage mergers and acquisitions and restructuring in an industry in which more than 140 Chinese and foreign players compete.

China's securities regulator said in March it aimed to develop about 10 leading institutions in about five years, with two to three internationally competitive investment banks and institutions by 2035.

So far there have been announcements of mergers and acquisitions between six pairs of smaller brokerages, including Ping An Securities and Founder Securities.

The latest announcement comes three months after Shanghai Communist Party Secretary Chen Jining urged Guotai Junan to "march toward becoming a globally competitive, and influential investment bank" during a visit to the brokerage.

($1 = 7.0921 Chinese yuan)