M.Stanley's CICC sale stalls over rules, price

By George Chen

NEW YORK (Reuters) - Morgan Stanley's (MS.N) plan to sell its 34.3 percent stake in a China-based brokerage has stalled over Chinese regulations and price, and the hitch may delay the launch of the Wall Street bank's new venture in the world's fastest growing major economy, sources close to the matter said on Wednesday.

Morgan Stanley is trying to exit its relationship with China International Capital Corp (CICC) after striking a deal to launch a new Shanghai-based investment banking venture with a local partner.

Negotiations between Morgan Stanley and potential buyers of the CICC stake, including private equity firms TPG, JC Flowers and Bain Capital, have become "very uncertain," and a final agreement under current Chinese regulations cannot be guaranteed, sources close to CICC said.

"Price is just one thing, while the other thing, which is more important, is that the Chinese securities regulator doesn't like (the idea of) foreign private equity firms getting the CICC stake," said one source with close ties to the China Securities Regulatory Commission (CSRC), which has the power to veto such a stake sale.

"After Chinese regulators expressed their views on the deal, the whole situation for Morgan Stanley and these new buyers became very uncertain," the source said.

The source added that Beijing had told Morgan Stanley that the government would rather see the stake go to an industry player, preferably a foreign bank with a global reputation and practice. The government considers private equity investors too speculative, the source added.

It may be difficult for Morgan Stanley to find such a buyer in the near term amid the snowballing U.S. credit crisis. Many big Western banks are struggling with huge write-downs.

Also, Morgan Stanley is unwilling to sell the CICC stake to a global rival. It has secured a number of big underwriting deals through its partnership with CICC and is wary of inviting new competition in China.

NEW JV DELAYED

Morgan Stanley is trying to end its relationship with CICC in part because Beijing won a management power game early this decade after promoting Zhu Yunlai, son of former Chinese Premier Zhu Rongji, and other Chinese staff to key jobs at CICC.

Also, late last year Morgan Stanley decided to team up with China Fortune Securities Co to launch a new investment banking venture, a deal that is also subject to approval from the CSRC. (For details: [nSHA89513])

"If you want to set up a new investment banking venture, you have to quit the existing one," said a second source with direct knowledge of the CICC situation.

"That's what the government has clearly told Morgan Stanley," she said. "In other words, if you can't quit CICC, the launch of your new venture will definitely be delayed."

Hong Kong's South China Morning Post newspaper reported on Wednesday that some private equity firms had offered $500 million for the stake. Morgan Stanley hoped to get around $1 billion, the paper said.

A Morgan Stanley representative in Hong Kong declined to comment. CICC also had no comment on the report.