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China Invests $5 billion in Morgan Stanley

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China Investment Corp (CIC), the nation's state-owned forex investment firm, said late Wednesday that it has agreed to invest $5 billion in the No 2 US investment bank Morgan Stanley.


The Chinese firm, which invested $3 billion earlier this year in the US private equity firm Blackstone Group, will purchase equity units that are mandatorily convertible into 9.9 percent of Morgan Stanley common shares.


The equity units carry a fixed annual interest rate of nine percent before conversion on August 17, 2010.


The purchase is "a long term, passive financial investment" and does not lead to a role in management of Morgan Stanley, said a statement from CIC.


"It is a good opportunity to invest in US-based financial institutions, many of which are being undervalued when the subprime mortgage crisis has had an impact on them," Li Yang, director of the Institute of Finance and Banking under the Chinese Academy of Social Sciences, said.


Also on Wednesday, Morgan Stanley reported a larger-than-expected loss in the fourth fiscal quarter due to a $9.4-billion writedown from its exposure to subprime and other mortgage-related investments.


It lost $3.61 billion in the fourth quarter, compared to a profit of $2.27 billion in the same period a year earlier.


"CIC believes that Morgan Stanley has potential for long-term growth, particularly in its investment banking, asset management and wealth management businesses, as well as new business development opportunities in emerging markets," said the statement.


The purchase is made in accordance with CIC's global investment strategy, which is to seek attractive long-term returns with acceptable risks, it said.


CIC will maintain a cautious investment strategy, Finance Minister Xie Xuren said last week at the China-US high-level economic talks. "It will pursue long-term investment instead of short-term speculation, and will achieve a balance between security and profitability."


China Investment Corp was set up in September this year, with an initial capital of $200 billion from the country's massive foreign exchange reserves.


One-third of the capital would be used to purchase Huijin Investment Co, an investment arm of the Chinese government, and another third would be injected into state-owned banks for shareholding reforms, CIC chairman Lou Jiwei said.


The remaining $70 billion was earmarked for overseas investment in a wide range of portfolios but would not seek control, he said.


Earlier this month, CIC made its second investment this year of about $100 million in the initial public offering of the China Railway Group in Hong Kong.


China has invested 2/3 of its reserves in US Treasury bonds. The US dollar's devaluation on world currency markets has provided poor returns, prompting the Chinese to invest in the global stock market for more profitable returns.


Credit Suisse predicted CIC would only take a 5-10% stake in each company, remaining a passive investor to avoid political hassles in overseas markets. CIC bought a $3 billion stake in Blackstone, one of the largest US private equity firms. CIC has refrained from influencing Blackstone's investment strategy. The company will mainly pursue combined investments in overseas financial markets.


CIC is thought to engage in building influence for the government by buying up significant stakes in companies that have influence in western governments including airline companies as also target firms that have heavily invested in China. The investments would help the government to influence the policies of multinational companies and to protect China's interests in international spheres.

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Guest Just Say No

China can have wall street.. all they now how to say is lower interest rates!!! Which is exactly what is causing all the financial problems we are having. The reality is that investors should look for

alternatives, particularly a resource - be it gold, oil soybeans - that cannot be created by the stroke of a pen.

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