EXCLUSIVE - China's CIC to buy U.S. mortgages - sources

By George Chen, Asia Private Equity Correspondent

HONG KONG (Reuters) - China's $200 billion sovereign wealth fund, which made big paper losses on stakes in Morgan Stanley and Blackstone, is set to invest up to $2 billion in U.S. mortgages as it eyes a property market recovery, two people with direct knowledge of the matter said on Monday.

China Investment Corp (CIC) plans to invest soon in U.S. taxpayer subsidised investment funds of toxic mortgage-backed securities, which it sees as a safer bet than buying into the $700 billion Troubled Asset Relief Program (TARP), also backed by the U.S. Treasury.

Under the Public-Private Investment Plan (PPIP) launched earlier this year, the U.S. government plans to seed a number of public-private investment funds that would combine taxpayer money with private capital to buy as much as $40 billion in toxic securities from banks.

Compared with TARP, the new and smaller PPIP program focuses on safer toxic securities, which must have so-called "Triple-A" ratings by at least two agencies, and are debts guaranteed by the U.S. Federal Deposit Insurance Corporation (FDIC), sources explained.

"In this case, CIC feels safer to invest and the safer it feels, the more confident it will naturally feel about its investments, as well as in the prospects for the U.S. economy," said one of the sources.

The move comes after the United States and China ended their first annual Strategic and Economic Dialogue late last month agreeing to lead the global economy out of recession, with China seeking safer investments in the world's leading economy.

"The Chinese government is always trying to seek a more ideal way to invest in U.S. assets rather than purely buying U.S. government bonds all the time," said the source.

"Some might think $2 billion for a $200 billion sovereign fund is not big money, but it can be regarded as an innovative and positive option for Chinese investment."