TWO Chinese tobacco companies are merging to form the world's fourth-largest cigarette producer by volume, a financial newspaper reported yesterday.

Hongyun Group and Honghe Group signed a letter of intent on Monday, the 21st Century Business Herald newspaper said, citing Li Weidong, an executive of their parent company, China Tobacco Yunnan Industrial Corp. It said the deal requires approval from China's State Tobacco Monopoly Administration.

The merged company would be named Hongyun Honghe Tobacco Group Company Ltd and would have plants in Yunnan and northwestern Xinjiang region, both tobacco-growing areas, the Business Herald said.

The two companies, both located in the southwestern province of Yunnan, produced 4.6 million cases of cigarettes last year, the Business Herald said. A case in China's tobacco industry is 50,000 cigarettes, making that equal to 230 billion cigarettes.

That would make the new company the world's fourth-largest producer after Philip Morris International Inc, British American Tobacco PLC and Japan Tobacco Inc.

China has the world's largest population of smokers, with around 350 million. Its tobacco firms produced 1.2 trillion cigarettes in the first six months of this year.

A woman who answered the phone at Hongyun's press office and refused to give her name declined to say whether a merger was planned. Phone calls to Honghe's press office and the headquarters of the parent company were not answered.