The firm’s financial picture darkened as it announced it was writing off $9.4bn.
Morgan Stanley mainly blamed this decision on loss-making mortgage investments, including subprime home loans granted to Americans with poor credit.
John Mack, the chairman and chief executive officer, said CIC’s cash infusion would reinforce Morgan Stanley’s stretched finances.
The Chinese fund controls a $200bn investment war chest.
Mack said that he had put a new management team in place and would not accept a bonus for 2007.
Still, speculation mounted over whether Mack would keep his job amid the mounting losses.
“Huge writedowns caused the ouster of Merrill Lynch & Co CEO Stan O’Neal and Citigroup Inc CEO Charles Prince. May be Morgan Stanley will follow them,” said Peter Cardillo, a market analyst at Avalon Partners.
China has been making increasingly aggressive investments in some of America’s premier financial companies this year.
Its moves have alarmed some US politicians who believe the deals could threaten national security.
CIC acquired a $3bn stake in the Blackstone Group, a large private equity firm, earlier this year and China’s CITIC Securities Co Ltd bought a six per cent shareholding in Bear Stearns, another US investment house, for $1bn in October.
Sovereign wealth funds operated by China, Singapore and Gulf Arab states are buying stakes in the US finance sector as Wall Street reels from a prolonged US housing downturn and heavy losses related to mortgage securities.
The mortgage losses and economic uncertainty have depressed the stock prices of many big banks in recent months, including Morgan Stanley.
Its shares were up over four per cent at $50.19 in mid-afternoon trading, but have tumbled from a peak this year of over $74 in June.
With the Morgan Stanley deal, China becomes one of the biggest shareholders in a US firm that traces its roots to 1854.
John Pierpont Morgan was considered the unofficial central banker of the US in the late 1800s and famed for helping reorganise the country’s railroads.