UPDATE 1-Morgan Stanley to buy stake in China's Jutian Fund

(Adds details, quote, background)

By George Chen

SHANGHAI, Sept 19 (Reuters) - Wall Street bank Morgan Stanley (MS.N) plans to buy into China's Jutian Fund Management Co in a move to tap China's red-hot wealth management sector, sources close to the situation said on Wednesday.

Morgan Stanley had signed an initial agreement with Jutian Fund, based in the southern Chinese boom town of Shenzhen near Hong Kong, and the small Chinese fund manager had applied to regulators to approve the deal, the sources said.

Jutian Fund plans to sell about a 50 percent stake in the firm to new foreign and domestic investors, including Morgan Stanley, as part of a restructuring to boost its business, said a Jutian Fund official who declined to be named.

The Jutian official declined to say how big a stake Morgan Stanley would take or how much it would pay, but said the Wall Street bank would be joined by a Chinese firm as a co-investor.

If the deal is approved, Morgan Stanley would transform Jutian Fund into a fund management joint venture controlled by the U.S. bank, said the sources, who declined to be identified.

The sources and the Jutian official said it was not certain if the deal would win regulatory approval.

"Probably the only issue left there now is whether they can secure approval from Chinese regulators," said one of the sources, noting that investments in the fund industry have been slow to get the green light as Beijing looks to control the rollout of new fund products.

A foreign investor is limited to owning less than 50 percent of a fund venture, according to Chinese regulations.

Last October, Morgan Stanley acquired the small Nan Tung Bank, a deal that gave it a coveted onshore commercial banking licence in China ahead of U.S. investment banking rivals.

Morgan Stanley also owns one-third of Beijing-based China International Capital Corp., the country's first investment banking joint venture.

A Hong Kong-based spokeswoman for Morgan Stanley declined to comment on Wednesday.

China's mutual fund industry has nearly 3 trillion yuan ($399.3 billion) in assets under management, up from 1.8 trillion yuan at the end of June.

About 30 foreign firms, including global bank HSBC Holdings Plc. (HSBA.L) (0005.HK) and JPMorgan (JPM.N), have set up fund management joint ventures in China, lured by $2 trillion of personal savings. Global money managers hope to draw some of that into fee-based vehicles such as mutual funds in China.

Jutian manages three mutual funds, including two equities funds and one money market fund, with total assets under management of around 500 million yuan, according to its Web site (www.jtfund.com).

Ping An Insurance (Group) Co (2318.HK) (601318.SS), China's second largest life insurer, was once in talks to buy a 35 percent stake in Jutian Fund before Morgan Stanley made a higher offer, sources have said. ($1=7.513 Yuan)