The $5bn investment in Morgan Stanley by China Investment Corp, the sovereign wealth fund, is raising questions about the future of the cash-strapped US bank’s stake in one of China’s premier investment banks.
Its 34 per cent passive holding in China International Capital Corp is a source of cash for Morgan Stanley, which this month announced its first quarterly loss and $9.4bn of writedowns on subprime losses.
Morgan Stanley would not comment on its stake, but relations with CICC have long been strained. When the joint venture was formed in 1995, Morgan Stanley contributed $37m of CICC’s total capital of $150m. Since then, CIC has taken over 43 per cent of CICC.
All the US bank’s recent initiatives in China have been conducted away from CICC. It recently acquired a commercial banking licence in China through its acquisition of Nan Tung Bank. Morgan Stanley also signed a preliminary agreement with China Fortune, a mainland broker, to set up a separate investment banking joint venture.
There would be plenty of potential buyers should Morgan Stanley decide to sell its stake, including private equity firms and foreign securities firms seeking a substantial foothold in China’s growing market. One or two of the world’s most prominent private equity firms are looking at the Morgan Stanley stake with keen interest.
Levin Zhu, head of CICC, does not want to see Morgan Stanley’s stake fall into foreign hands, according to a former executive at CICC. CICC probably lacks the money to buy out Morgan Stanley single-handedly.
Other possible candidates to buy the US bank’s stake include Singapore’s Government Investment Corp, which has controlled 7.5 per cent of CICC since the latter’s inception in 1995. Another could be the newly established local private equity firm of Fang Fenglei, the veteran mainland banker who has served as an executive of CICC.
CICC has never sought to go public, although there have been precedents. Citic Securities’ listing on the Shanghai Stock Exchange resulted in a $40bn increase to its market capitalisation in the autumn, making it more valuable than either Lehman Brothers or Nomura Securities. Citic is considering a Hong Kong listing, which would make it even more formidable.
One senior executive at CICC in Beijing said the firm’s management had not “had time” to consider such a path. Numerous bankers have pointed out that to go public the group would have to disclose sensitive information, in particular about executive compensation.
Because CICC is a joint venture, the pay scale is far higher than at local securities firms such as Citic.
The matter is particularly sensitive because Mr Zhu is the son of China’s former premier, Zhu Rongji. Mr Zhu is paid a salary of millions of dollars, according to a person who has direct knowledge of the matter.
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