Morgan Stanley Raising China Fund

Morgan Stanley has joined global buyout firms such as The Blackstone Group and The Carlyle Group in a rush to tap China’s booming private equity market, partnering with the eastern city of Hangzhou to launch yuan-denominated funds, according to the news wire service of Thomson Reuters, also publisher of Buyouts.

Morgan Stanley has signed a partnership agreement with the local government and has decided to establish its China headquarters for private equity investment in the city, the Hangzhou government said on its Web site. Morgan Stanley and its partner aim to raise 1.5 billion yuan ($225 million) in the initial phase, a source with direct knowledge of the plan told Reuters. It will invest in non-public companies.

Chinese media reported this month that U.S. private equity giants Warburg Pincus and Kohlberg Kravis Roberts & Co. planned to set up units in Shanghai to launch yuan funds, following in the footsteps of rivals Blackstone, Carlyle and Bain Capital.

China is encouraging the development of the private equity industry, hoping to channel more liquidity into the private sector to aid economic growth. Beijing also expects to use foreign expertise to improve corporate governance.

“We hope that the partnership with Morgan Stanley would help boost private sector investment, accelerate economic restructuring and boost the local private equity industry,” the Hangzhou city government said in a statement.

A Morgan Stanley spokesman confirmed the partnership but declined to comment on the size of the fund. Morgan Stanley’s tie-up with Hangzhou follows its acquisition of a 20 percent stake in the government-backed Hangzhou Industrial & Commercial Trust Co. in 2008. Chinese cities, including Hangzhou, Shanghai and Beijing, are competing to woo foreign private equity firms with tax and other incentives.

“Partnering with local governments will make fundraising in China much easier for those global private equity firms,” said Wesley Li, analyst at Beijing-based consultancy ChinaVenture. “With government backing, foreign firms could also access those companies or sectors that would otherwise be off limits to foreign investment.”

China forbids foreign investment in certain sectors deemed strategically important, while encouraging it in others. TPG, one of the world’s biggest private equity firms, launched two 5-billion-yuan funds in August, in Shanghai and western Chongqing, through partnership with the cities’s respective governments. Carlyle has partnered with the Beijing government as well as Shanghai-based Fosun Group to launch yuan funds.

Morgan Stanley’s private equity unit has conducted over $6 billion in transactions globally since 1985, and in China, the investment bank has made private equity investments in companies including insurer Ping An , dairy producer Mengniu and shoe seller Belle International. Morgan Stanley is also planning to set up a brokerage joint venture with China Fortune Securities Co., after selling its stake in China International Capital Corp.

Fortune Securities shareholders have agreed to the joint venture plans with Morgan Stanley, signalling that the long-planned venture will go ahead soon.

Samuel Shen is a Reuters correspondent in Shanghai. George Chen also contributed to this report.