Business

CIC gets Fed nod for Morgan stake

By Wang Bo (China Daily)
Updated: 2010-09-02 15:41

Beijing - China Investment Corporation (CIC) has got the necessary approvals from the US Federal Reserve to acquire a 10 percent voting stake in Morgan Stanley after the sovereign wealth fund said it will not seek operational control of the investment giant.

The deal will have no adverse effect on competition or on the concentration of banking resources as the CIC does not intend to "exercise or attempt to exercise a controlling influence" over the management of Morgan Stanley, the Fed said in a statement.

CIC has said it will not seek or accept more than one representative position on the board of directors of the New York-based investment company. The fund said its indirect investment will be a passive investment.

The fund currently holds 2.49 percent stake in Morgan Stanley. CIC also has $5.58 billion of the Morgan Stanley securities it purchased in 2007, which were converted into common shares earlier this month.

After the share conversion, CIC will effectively increase its stake in the investment company to between 9 and 10 percent, thereby necessitating approval from the Fed.

The Fed had earlier said that holdings of more than 5 percent in US banks to be approved by it. Morgan Stanley, which underwent a restructuring in September 2008, also falls in this category.

"The portion of shares that would have caused CIC to own more than 4.99 percent of Morgan Stanley's voting shares were transferred into a custody account, and these shares will be released on Board approval of this application and the expiration of the 15-day waiting period," the Fed said in the statement.

To meet regulatory requirements and avoid more stringent government review, CIC sold a large amount of the common shares it owned before the conversion for some $700 million since July this year, when shares of Morgan Stanley jumped on better-than-expected earnings growth.

However, as the second largest shareholder of Morgan Stanley, CIC still see its massive investments in the US financial holdings group in a loss. In late 2007, CIC invested $5.6 billion in Morgan Stanley at $48.07 per share, far higher than the company's current trading price of $24.9 a share.

The fund bought an additional $1.2 billion of shares in Morgan Stanley's equity offering in June 2009, a move to prevent its stake from being diluted by a capital infusion from Tokyo-based Mitsubishi UFJ Financial Group.

Basing on Morgan Stanley's average trading price of some $26 in the past 30 days, the book value of CIC's investment is about $3.9 billion, indicating a loss of around $900 million after deducting interest income from the investment.

Set up by the Chinese government with a mission of diversifying the nation's huge foreign exchange reserves, CIC has been facing regulatory barriers in its overseas investments. That comes, despite the fund's contention that its investments are for financial returns only and do not have any national agenda.

China Daily