US investment bank Morgan Stanley has turned to China for a cash injection after it reported a stunning fourth-quarter loss fuelled by $9.4 billion of losses in sub-prime mortgages and other assets. China has agreed to pump in $5 billion, which could translate into a 9.9 per cent stake in Morgan Stanley. This is the investment bank's first quarterly loss in its 72-year history.

This marks another capital infusion by a sovereign wealth fund into a major investment bank hurt by the credit crunch. Earlier, Citigroup agreed to sell a 4.9 per cent stake to Abu Dhabi for $7.5 billion, while UBS accepted a $9.75 billion investment from Singapore's investment arm.

Analysts hope Morgan Stanley's large write-down and the cash injection from China's foreign exchange fund is a sign that the sub-prime mess is beginning to unwind. But sceptics maintain that the deal is a sign of weakness.

Unlike at Merrill Lynch and Citigroup, Morgan Stanley chief executive John Mack wasn't asked to step down. But Mack, who pocketed $37 million in salary, bonus, restricted stock and other payments last year, said he would forego his bonus this year. Just last month, he ousted protégé and co-president Zoe Cruz, and shook up the firm's fixed income and risk management leadership.

Last month, Morgan Stanley said traders betting the bank's own capital had incurred losses of $3.7 billion on sub-prime mortgages. On Wednesday 19 December, the bank disclosed another $5.7 billion in write-downs, representing further declines in the mortgage trades and losses on other debt.

With the write-downs knocking down earnings by $5.80 a share, Morgan Stanley posted a net loss from continuing operations of $3.59 billion or $3.61 a share for the quarter ended 30 November. A year earlier, Morgan had profits of $1.98 billion or $1.87 a share.

To restore its eroded capital, Morgan has agreed to sell equity units that pay a 9 per cent coupon. China will be a passive investor. In a way, it's a payback; more than a decade ago, Mack helped forge the China International Capital Corp banking venture, in which Morgan Stanley owns a passive 34 per cent stake.

Earlier this month, Mack travelled to China to set up a new investment banking venture with the Shanghai-based China Fortune Securities. The bank wants licenses that will enable it to undertake banking and money management operations.

Morgan Stanley's results came a day after Goldman Sachs reported a 2 per cent profit increase, as its fixed income traders sidestepped the credit problems that snagged the rest of Wall Street. Lehman Brothers said last week that earnings fell 12 per cent after $3.5 billion in write-downs.

Morgan Stanley says $7.8 billion in write-downs came from sub-prime trading positions that fell further after the bank's 7 November warning. It also wrote down $1.6 billion in mortgages held by a bank unit, commercial mortgages and other loans.

Citigroup last month warned it could write off assets worth $8 billion to $11 billion. Merrill Lynch wrote off $8.4 billion in the third quarter, with more losses expected. But Morgan said it reduced its exposure to problem assets during the quarter, with sub-prime mortgage pared down to $1.8 billion on 30 November, from $10.4 billion in August.

The trading debacle is the first serious setback for Mack after he replaced Philip Purcell as CEO in 2005. Mack directed the bank to take on more risk and expand businesses like mortgages and leveraged lending, to boost profit and growth.

Those efforts paid off initially, as Morgan reported mortgage gains even after sub-prime markets started to falter. But the move ultimately backfired, as markets worsened beyond traders' worst expectations.

Morgan Stanley's institutional securities unit posted a pre-tax loss of $6.5 billion, compared with $2.2 billion of pre-tax income last year. The losses overshadowed strong results from the rest of the company, including record revenue numbers in many businesses and rising profit from overseas markets. Within the fixed income segment, results from foreign exchange and interest rate trading were strong.

The slowdown means Morgan Stanley, which announced 900 layoffs in recent weeks, may cut more jobs and shift resources to other, faster-growing areas.