The CIC deal caps a year when deal outflows from China have overtaken inbound mergers and acquisitions for the first time. China outbound deals have totaled $29.2 billion this year versus $21.5 billion of inbound deals, according to Thomson Financial.

That shift has come as foreign cash piles up relentlessly on China's balance sheets. China's pile of foreign reserves is the world's largest at more than $1.4 trillion.

The Morgan Stanley deal, China's second-largest overseas investment to date, is a surprisingly bold stroke for the country's young $200 billion sovereign-wealth fund after an early stumble. In June, CIC paid $3 billion for a 9.3% stake in Blackstone Group LP's initial public offering. Since then, Blackstone shares have lost more than a fifth of their value, erasing $633 million in the paper value of China's investment.

By investing in Morgan Stanley, CIC is showing a willingness to seize opportunity and be aggressive again at a time when Wall Street banks look more like distressed assets. "This deal is a big surprise," said Stephen Green, a senior economist at Standard Chartered in Shanghai. "The U.S. subprime crisis created an opportunity and they jumped at it."

The terms of the deal guarantee CIC a 9% annual return, well above the fund's 5% cost of funding until it converts its investment to shares in 2010. CIC will have no representation on Morgan's board.

For Morgan Stanley, the deal could offer it some measure of good will in a country that has remained elusive to Wall Street.

Striking deals in China has become increasingly difficult, as Beijing fears some Chinese assets have gone to foreign investors too cheaply. Skyrocketing stock prices have contributed to this feeling and prompted regulators to scuttle deals by Western firms.

For CIC, the investment in Morgan Stanley could open access to expertise the giant fund is keen to acquire, Western investors in China say. For Morgan Stanley, the CIC deal deepens longstanding ties with China while offering the hope that the bank could be in an advantaged position to bring deals to the fund or offer assistance with other transactions.

Though China continues to attract the world's highest levels of foreign direct investment-$61.68 billion in the first 11 months of this year, an increase of 14% on the year-the size of the biggest outbound investment deals have this year far exceeded inbound investments. The top five outbound investments from China were for an average of $3.1 billion, according to Thomson Financial, while the top inbound deals were for an average of only $202 million.