China Wealth Fund Plays Down Morgan Stanley Talk

BEIJING (Reuters) – China Investment Corp on Friday dampened speculation that the sovereign wealth fund could be ready to increase its stake in U.S. investment bank Morgan Stanley (MS.N).

CIC bought 9.9 percent of Morgan Stanley last December and is in talks to raise its holding to as high as 49 percent, according to sources familiar with the plans.

A senior CIC official, quoted by the official Xinhua news agency, acknowledged that rumours were swirling, but said Wall Street’s two remaining stand-alone investment banks, Morgan Stanley and Goldman Sachs (GS.N), were capable of tackling their problems on their own.

“CIC will stick to its cautious attitude when it comes to overseas investments. Morgan Stanley and Goldman Sachs have fairly good capital adequacy ratios at present, and they can solve the problems they face independently,” Xinhua’s Chinese-language dispatch paraphrased the official as saying.

Any foreign investor seeking to buy into a U.S. financial institution would face serious political obstacles in America, the official said.

He pointed to systemic risks in the U.S. financial markets, which he said were characterised by spreading panic.

In the absence of U.S. government action, a capital infusion from a single overseas financial institution would not address the current liquidity shortage, Xinhua quoted the official as saying.

An earlier, English-language Xinhua article quoted an unidentified CIC official as making similar points. It was not clear if the two stories were based on the same source.

“Even if the CIC intended to buy a stake, it could be very hard now as the purchase of a stake, even one smaller than 10 percent, could be subject to the U.S. government foreign investment review,” the official was quoted as saying in the English article.

Morgan Stanley is also in merger talks with Wachovia Corp (WB.N) and other banks as it seeks fresh capital to ride out an unprecedented financial storm sweeping Wall Street.

CAUTION IS THE WATCHWORD

CIC was founded a year ago to generate higher returns on $200 billion of China’s official foreign reserves. The central bank separately manages another $1.8 trillion in reserves.

A banker who has spoken this week to CIC said the fund, along with other Chinese state-owned financial institutions, was keen to put money to work in beaten-down U.S. financial stocks.

At the same time, the banker said, Chinese institutions were nervous about taking the plunge because of steep losses that CIC has suffered after buying into Morgan Stanley and U.S. private-equity house Blackstone (BX.N) last year.

China Development Bank’s 3.1 percent stake in British Bank Barclays (BARC.L:) is also deep under water, as is an investment by Ping An Insurance (601318.SS) (2318.HK) in Belgian-Dutch financial firm Fortis (FOR.BR).

“In view of the global financial turmoil, Chinese financial institutions are likely to adopt a more cautious approach towards overseas investments,” Jing Ulrich, the chairman of China equities at J.P. Morgan, said in a research note on Thursday.

If CIC were to raise its stake in Morgan Stanley, the fund could trigger a backlash at home as well as in the United States.

Opinions on the Internet of CIC’s overseas investments have been mostly hostile, with many bloggers questioning why China is spending its wealth abroad and not at home.

“Why is no Chinese institution able to make money from overseas deals? Why have all of them made huge losses in a stupid way while foreign strategic investors are making massive profits in China?” asked one contributor on Tianya.cn.

Beijing in fact tapped CIC on Thursday to prop up the sagging domestic share market, instructing the fund to buy listed stocks through its Central Huijin investment vehicle.

It was the first time in the 18-year history of China’s modern stock markets that the government has announced that it will buy shares to support the market [ID:nSHA75465].

The main Shanghai share index .SSEC leaped 9.46 percent in response on Friday but is still down 66 percent from last October’s record peak.

(Reporting by Alan Wheatley and Zhou Xin, Editing by Ian Geoghegan)