US approves Chinese stake in Morgan Stanley

The U.S. central bank and regulator said the government-backed wealth fund was free to buy up the 10 percent stake, noting that CIC had vowed not to try to control how the U.S. firm is run.

“Based on the foregoing and all the facts of record, the board has approved CIC's application to acquire up to 10 percent of the voting shares of Morgan Stanley,” the Federal Reserve said in a statement.

CIC currently holds 2.49 percent of voting common stock of Morgan Stanley which it had purchased in 2009, the Federal Reserve said.

It required the Fed's authorization to hold up to 10 percent in the investment bank after some US$5-billion-worth of securities it had bought in the investment bank at the start of the subprime mortgage crisis in 2007 were converted into voting shares earlier this month.

The shares, which would effectively increase CIC's share stake to between nine and 10 percent, are currently held in a custody account which will be released following the board's approval, it said.

The Chinese government created CIC in 2007 with the aim of investing overseas China's massive foreign exchange reserves, which reached a record US$2.454 trillion at the end of June 2010.

CIC currently has investments at a value of some US$300 billion.

According to Eurasia Group analyst Michal Meidan, CIC's converted securities initially accounted for more than 10 percent of Morgan Stanley shares, which led the Chinese fund to sell a large quantity of shares in recent weeks.

Before the sale, CIC's stake was expected to reach 11.64 percent of the financial holding group, or 171.6 million shares, which would have placed CIC under more stringent review by U.S. authorities, Meidan said.

The move came as New York-based Morgan Stanley, which has assets of about US$626 billion, announced higher-than-expected write-downs of US$9.4 billion on subprime and other mortgage related debt.

In its statement, the Federal Reserve said that the approval of the CIC stake came after the Chinese investment bank offered assurances that its investment will be passive.

“CIC has stated that it does not propose to control or exercise a controlling influence over Morgan Stanley.

“The Board has concluded that CIC would not acquire control of, or have the ability to exercise a controlling influence over, Morgan Stanley,” it said,

According to Meidan, “the U.S. authorities at some point wanted the Chinese to help out the American banks, but the Chinese kept a safe distance from the American market during the economic crisis.”

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