By George Chen

SHANGHAI (Reuters) - Morgan Stanley <MS.N> plans an investment banking joint venture with China Fortune Securities, one of the country's oldest brokers, to expand its business and win clients in the fastest-growing major capital market, sources close to the situation said on Friday.

The Wall Street bank, which signed a strategic cooperation agreement with Shanghai-based China Fortune earlier this week, intends to own at least one third of the proposed venture, the sources, who declined to be identified, told Reuters.

The closed-door signing ceremony was attended by senior Chinese officials and Morgan Stanley representatives, including Chief Executive John Mack.

ADVERTISEMENT

A spokeswoman for Morgan Stanley declined to comment.

Senior representatives of Morgan Stanley and China Fortune are finalizing details such as the size of the firm's capital and the number of board members, the sources said.

"Since the preparations of the venture have already won blessing from senior Chinese officials, I don't think it will be too difficult for Morgan Stanley to win Beijing's approval for the venture," said one of the sources.

China Fortune is jointly owned by several subsidiaries of state-owned Shanghai Electronics Group, including Feilo Acoustics <600651.SS> and chip maker Shanghai Belling

<600171.SS>.

Some Chinese shareholders of China Fortune are expected to own a combined minority stake in the planned venture, while Morgan Stanley wants management control, the sources said.

If successful, Morgan Stanley would become the first foreign bank to have two investment banking joint ventures in China. It already owns about one third of China International Capital Corp (CICC), established in 1995.

Morgan Stanley's rivals, such as Goldman Sachs <GS.N> and UBS <UBS.N> <UBSN.VX>, also have investment banking ventures in China in which they have de facto management control.

But Morgan Stanley had limited influence on the management of CICC, which is run by Zhu Yunlai, son of ex-Premier Zhu Rongji.

DOOR RE-OPENS

Morgan Stanley's Mack left Shanghai on Thursday for Beijing, where U.S. Treasury Secretary Henry Paulson will next week hold economic talks with Chinese officials. Sources said the talks would include Chinese approval for investment banking ventures.

Beijing announced in May it planned to resume issuing licenses for securities ventures in the second half of the year after a two-year overhaul of its once-troubled brokerage sector.

Currently, foreign investors can hold up to 33 percent in an investment banking venture and are allowed to buy stakes of up to 20 percent in domestic stockbrokers.

Senior U.S. officials and executives are expected to push for Beijing to raise the foreign investment cap for brokers during the meetings in Beijing next week, the sources said.

The Chinese government has not said when it would re-open the sector to foreign investment, but the sources said the China Securities Regulatory Commission was expected to start processing applications for investment bank ventures by the end of the year.

Investment banks such as Credit Suisse <CSGN.VX>, Citigroup <C.N> and JPMorgan <JPM.N> are scouring for partnerships in China to tap the country's rapidly-expanding capital markets.

(Editing by Jan Dahinten)