Oct. 22 (Bloomberg) -- Bear Stearns Cos., reeling from mortgage-related losses, shored up investor support by selling a stake to China's government-controlled Citic Securities Co. and gaining a foothold in the world's best-performing stock market.

Citic, Asia's largest securities firm, will pay $1 billion for the equivalent of 6 percent of New York-based Bear Stearns's shares, and the U.S. brokerage will invest the same amount in Citic, the companies said in a statement today. They agreed to team up to sell financial products and services in China, and plan a Hong Kong-based joint venture for other Asian markets.

Bear Stearns Chief Executive Officer James ``Jimmy'' Cayne, 73, trails U.S. rivals in China, where he has struggled to build a business since opening a Beijing office in 1992. His company has fallen as much as 37 percent this year in New York trading, beset by the collapse of the U.S. subprime mortgage market. Surging defaults on loans to home buyers with poor credit histories pushed two of the firm's hedge funds into bankruptcy and eroded its fixed-income revenue.

``Bear Stearns has been behind the curve internationally; this will help them catch up,'' said Rose Grant, who helps manage about $2 billion at Eastern Investment Advisors in Boston. ``It doesn't hurt to get an investment from them while investing in China at the same time.''

China has accumulated positions in other financial companies outside its home market this year. China Investment Corp., the nation's $200 billion sovereign wealth fund, paid $3 billion for a stake in New York-based private equity firm Blackstone Group LP in May. Barclays Plc, the U.K.'s third-biggest lender, agreed to sell 6.7 percent of itself to China Development Bank in July.

Conversion

Beijing-based Citic will buy 40-year convertible trust preferred securities in Bear Stearns, and could increase its stake to 9.9 percent of the U.S. firm's shares, the companies said. Bear Stearns will buy six-year convertible debt and five- year options in Citic.

The accord will give Bear Stearns access to Chinese firms looking to raise capital or invest outside of the country, the firm said. Bear Stearns clients will benefit from Citic's relationships in the region, UBS AG analyst Glenn Schorr said in a report today.

The conversion prices will be based on the share prices of the companies in the five trading days before Oct. 19.

The investment by Citic should be considered equity by credit-rating agencies while Bear's investment, at least initially, amounts to a loan, said Bruce Foerster, president of Miami-based advisory firm South Beach Capital Markets.

`Bases Loaded'

``It's a big step for their international expansion, and it shores up their balance sheet,'' Foerster said.

Bear Stearns can convert Citic's trust securities into equity in the five years after the transaction closes. After 40 years, they'll automatically convert to Bear Stearns stock.

The Citic debt that Bear Stearns is acquiring will mature in six years. The U.S. firm can recoup its cash at that point if it decides not to convert the debt into shares.

``China is one of the fastest-growing economies in the world,'' Cayne said in a phone interview today. ``This is the deal of a lifetime.''

While international expansion is more of a priority for Bear Stearns than it has been before, the firm doesn't plan to make overseas investments that are larger than the Citic transaction.

``If you've just hit a home-run with the bases loaded, are you worried about hitting another double or single?'' Cayne said. ``You don't think like that.''

Pass the Infusion

Bear Stearns shares erased some of their losses this year when speculation about a Chinese investment in the firm resurfaced in August. They gained $1.44, or 1.2 percent, to $117.85 in New York Stock Exchange composite trading today. The stock is down 28 percent this year, the second-worst performance among the top five Wall Street banks.

``The stake they sold is very small,'' said Tom Jalics, an analyst at National City Bank in Cleveland who helps manage $32 billion, including Bear Stearns shares. ``To me this says they don't need the money, which is a good thing.''

Cayne said he wasn't looking for a cash infusion, repeating a statement he made Oct. 4. He said he was interested only in a partner that would bring ``strategic, geographic'' diversity.

Bear Stearns's China ties go back 20 years, when the firm almost sold a stake to Hong Kong-based Jardine Matheson Holdings Ltd. The agreement to sell a fifth of the U.S. company for $380 million fell through in 1987, when Asian markets crashed. Bear Stearns's market value has since grown eight-fold, to $16.9 billion.

The Card Game

In 1992, when Cayne opened the firm's Beijing office, he took part in a bridge tournament with top Chinese government officials. Participants included Wan Li, chairman of the National People's Congress, and Deng Pufang, the eldest son of the late Deng Xiaoping, China's former leader, according to a New York Times report on Dec. 20, 1992.

The next year, Bear Stearns led the $93 million initial share offering by Ek Chor China Motorcycle Co., one of the first Chinese companies to sell stock in the U.S. A red Ek Chor motorcycle still adorns Cayne's office.

Since then, Bear Stearns has lagged behind peers in global expansion. A quarter of the firm's revenue came from non-U.S. markets in the first nine months of this year, the lowest ratio among the top five U.S. banks. Goldman Sachs Group Inc., the No. 1 securities firm, reaped more than half its revenue overseas.

Cayne's alliance with Citic Securities may help Bear Stearns make inroads. Citic is the investment arm of Citic Group, which is controlled by China's State Council. Citic Group President Chang Zhenming said last week that he has known Cayne since 1992, when ``we played cards together.''

$50 Billion Market Cap

Citic Group was established in 1979 by former Chinese Vice Premier Rong Yiren to attract foreign capital as the nation began free-market reforms. It has 44 subsidiaries spanning industries from brokerage and banking to oil exploration. The company, with 929 billion yuan ($124 billion) of assets at the end of 2006, posted profit of 6.1 billion yuan last year.

It owns 26 percent of Citic Securities, the Chinese brokerage whose market value has more than quadrupled this year to more than $50 billion, making it Asia's largest securities firm. The subsidiary is run by Chairman Wang Dongming. Citic Group also controls 62 percent of China Citic Bank Corp., which raised $5.95 billion in a Hong Kong initial share sale in May.

Citic Securities reported last week that nine-month profit increased to at least 8 billion yuan from 944.9 million yuan a year earlier, driven by stock trading in a market where the benchmark CSI 300 Index almost tripled this year.

Schumer's Approval

Its market value is $46.8 billion according to last week's closing share price in the Shanghai exchange. The shares were suspended from trading today.

The two sides said today that successful completion of their agreement in principal depends on governmental and regulatory approvals. China has at times blocked foreign investment in its financial-services industry, while the U.S. has prevented some Chinese investments, citing security concerns.

Both firms are in dialogue with regulators in China and the U.S. and don't anticipate any unresolvable issues, Cayne said.

U.S. Senator Charles Schumer, the New York Democrat who led opposition to Dubai's DP World buying six U.S. port operations last year, signaled his approval of the Chinese investment in Bear Stearns.

``An independent Bear Stearns is good for New York and America,'' Schumer said in an e-mailed statement today. The Citic investment ``helps keep Bear Stearns independent,'' he said.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: October 22, 2007 17:10 EDT