Morgan Stanley/ CIC

Reuters is reporting that Morgan Stanley has approached the China Investment Corporation (CIC) for additional capital; it isn’t just talking to Wachovia.

It order to get the equity it needs, the CIC’s stake would need to be quite large. Bloomberg reports:

"Morgan Stanley pared its loss on the New York Stock Exchange after the person said China’s state-controlled fund may buy as much as 49 percent of the New York-based investment bank. The person declined to be identified because the talks aren’t public and may end in no agreement."

This kind of investment (some might say "risky bet") would have to be approved by China’s State Council. And I would have to say that the CIC has yet to demonstrate a track record of apolitical, transparent management of its external assets -- in part because it hasn’t been around for very long and in part because it hasn’t been very transparent.

It also is obviously something that the US regulators would need to approve -- and especially in light of the Fed’s recent decision to exempt the CIC from the requirements of the Bank Holding Company act.

UPDATE: The FT’s alphaville has more.

CIC, the Chinese sovereign wealth fund which already owns 9.9 per cent of Morgan Stanley, is definitely talking to the investment bank.

The President of CIC even travelled to the US on Tuesday accompanied by Morgan Stanley’s China CEO.

CIC was previously part of the Bank of America-led consortium that was considering a takeover bid for Lehman Brothers, alongside JC Flowers & Co.

Christopher Flowers manages about $3.2bn of CIC’s money in a fund dedicated to taking stakes in financial institutions.

It is very unlikely CIC would attempt a takeover of Morgan Stanley on its own, and the prospect of the Chinese government effectively owning one of the last two investment banks left on the Street would startle US regulators, to say nothing of the US Congress.

The last line is certainly right -- the debate over whether China’s government is a political investor (remember Friday’s news about SAFE’s conditional investment in Costa Rican bonds) -- would be turbocharged.

Morgan Stanley is also clearly talking to Wachovia.