Morgan Stanley to form China broker JV

By George Chen

SHANGHAI (Reuters) - Morgan Stanley (MS.N) plans to form an investment banking joint venture with China Fortune Securities, among the country's oldest brokers, to expand its business in one of the world's fastest-growing markets, people close to the situation said on Friday.

The Wall Street investment bank, which signed a strategic cooperation agreement with Shanghai-based China Fortune earlier this week, wants to own at least one-third of the proposed venture, the sources told Reuters.

The closed-door signing ceremony was attended by senior Chinese officials and Morgan Stanley representatives, including Chairman and Chief Executive John Mack.

Senior representatives of Morgan Stanley and China Fortune are finalizing details such as the amount of start-up capital and the composition of the board, the sources said.

"Since the preparations of the venture have already won blessing from senior Chinese officials, I don't think it will be too difficult for Morgan Stanley to win Beijing's approval for the venture," said one of the sources.

Morgan Stanley declined to comment.

China Fortune is owned by several units of state-owned Shanghai Electronics Group, including Feilo Acoustics (600651.SS) and chipmaker Shanghai Belling (600171.SS).

Some Chinese shareholders of China Fortune are expected to own a combined minority stake in the planned venture, while Morgan Stanley wants management control, the sources said.

SECOND EFFORT

If successful, Morgan Stanley would become the first foreign bank to have two investment banking ventures in China. The world's second-largest investment bank was a pioneer in 1995 with its investment in China International Capital Corp (CICC), the nation's leading securities firm.

But Morgan Stanley has been pushing for a more substantial presence in China beyond its passive, 34 percent investment in CICC. The U.S. bank has little influence on CICC, which is run by Zhu Yunlai, son of ex-China Premier Zhu Rongji.

That limits Morgan's opportunity to benefit from the expansion of China's domestic markets. Deal activity is expected to surge as state companies sell shares to the public and private sector businesses raise capital outside China.

"The relationship has been fairly skittish," said Benjamin Wey of New York Global Group, an adviser and consultant active in China. "Morgan Stanley has no management control, no ability to sell its products into China or bring deals out of China."

Morgan last October acquired Nan Tung Bank, though that involved commercial banking. In an April interview, Mack told Reuters he was eager to secure a bigger claim in the country.

"We're really happy with CICC, but if we get the opportunity to have our own license, we'd prefer that," Mack said on the sidelines of the bank's annual meeting.

Morgan in some ways lost ground to rival Western banks that have set up China ventures that they can control.

Goldman Sachs (GS.N) in 2004 bought a 33 percent stake in a venture formed with Gao Hua Securities. The deal gives Goldman control and an opportunity to build a majority stake in time.

UBS (UBS.N) likewise gained a foothold this year with a stake in Beijing Securities. Renamed UBS Securities, the venture quickly became a top underwriter of domestic deals.

Both UBS and Goldman invested capital into struggling Chinese brokers. Morgan Stanley likely will be asked to do the same before China grants a license, bankers said.

But China two years ago closed the door to foreign banks seeking stakes in the country's securities sector.

Citigroup (C.N), JPMorgan Chase (JPM.N) and Merrill Lynch MER.N as a result have scoured China for partnerships as they await the end of the moratorium. That day may be near.

DOOR RE-OPENS

Mack left Shanghai on Thursday for Beijing, where U.S. Treasury Secretary Henry Paulson will next week hold economic talks with Chinese officials. Sources said the talks would include Chinese approval for investment banking ventures.

Beijing announced in May it planned to resume issuing licenses for securities ventures in the second half of this year after a two-year moratorium, as it worked to overhaul once-troubled domestic brokerages.

Currently, foreign investors can hold up to 33 percent in an investment banking venture and are allowed to buy stakes of up to 20 percent in domestic stockbrokers.

Senior U.S. officials and executives are expected to push for Beijing to raise the foreign investment cap for brokers during the meetings in Beijing next week, the sources said.

The Chinese government has not said when it would reopen the sector to foreign investment, but sources say the China Securities Regulatory Commission is expected to start processing investment bank venture applications soon.

Earlier Friday, Reuters reported that Credit Suisse CSGN.V agreed to form a partnership with China's Founder Securities, according to a memo. The agreement, which requires regulatory approval, would let the Swiss bank underwrite offerings and advise on mergers.

(Reporting by George Chen in Shanghi; Additional reporting by Joseph Giannone in New York; Editing by Jan Dahinten and Dave Zimmerman)