SHANGHAI, CHINA - Citic Securities, China's top brokerage by assets, is back in talks with Bear Stearns to get a bigger stake in the Wall Street bank, whose shares have tumbled 30 per cent since the two firms agreed to swap stakes last October.

If successful, the brokerage arm of China-controlled Citic Group would become the largest single shareholder of the firth-largest United States investment bank. It also would gain a bigger stake at the same terms, pressing its advantage with a firm eager to bolster its financial strength.

'Like any smart investor, China is taking advantage of the moment,' said Mr Brad Hintz, a brokerage analyst at Sanford Bernstein in New York. 'They know if they were to pull away, it would send the stock into a tailspin and spook creditors.'

After speaking with China's government, Citic Securities is renegotiating the offer, the sources said. Citic now expects to get a 9.9 per cent stake in Bear Stearns, the maximum allowed without triggering more intense government scrutiny.

In October, Citic Securities agreed to invest US$1 billion (S$1.4 billion) in securities that would give it a 6 per cent stake. Bear Stearns would then buy US$1 billion of Citic Securities debt, convertible to a 2 per cent stake in the Beijing-based financial firm.

The US$1 billion amount that the two firms would invest in each other is so far unchanged, the sources said.

Based on Bear's outstanding shares, Citic would effectively pay roughly US$79 a share for the larger stake, down 40 per cent from about US$130 per share under the original deal.

The new terms come closer to Bear's current market value.

On Thursday, its stock fell US$1.65, or 2 per cent, to US$79.10.

Tough spot

Bear was likely to accept Citic's new proposal as it was keen to find new investors to boost its capital, said the sources, who both declined to be identified because they were not authorised to speak to the media.

A Chinese company taking such a large stake in a US bank could meet political resistance in the United States, where lawmakers are concerned about the rising influence of foreign-run companies in the country.

In recent months, Merrill Lynch, Morgan Stanley and Citigroup have tapped sovereign wealth funds for billions of dollars of new capital to help work through their credit and mortgage losses.

China is striking a number of increasingly ambitious deals overseas, including Chinalco's US$14 billion investment in mining giant Rio Tinto together with Alcoa, and ICBC buying a stake in South Africa's Standard Bank.

Since Bear and Citic signed their pact, the US mortgage crisis has continued to snowball, hobbling Bear's biggest money maker and triggering further write-downs for banks worldwide.

The sources said Citic Securities felt it would be difficult for the original deal to win approval.

'Chinese regulators will not feel happy if they see Citic Securities buying the stake of Bear Stearns at the original price,' one of the sources said. 'Beijing is also facing domestic concerns that Chinese firms are probably paying too much for foreign assets.'

In China, some local economists and investors have complained that Beijing has invested too much in overseas markets and bought Western assets at too high a price.

China Investment Corp (CIC), the country's sovereign wealth fund, last year put US$3 billion into US private equity firm Blackstone Group and has taken a US$5 billion stake in Morgan Stanley. Shares of both US companies have fallen sharply amid the credit crunch.

Completion of the Citic-Bear deal could be delayed as it awaits approval from Chinese regulators by April or May because of the latest proposed changes, both sources said.

In October, former Bear Stearns CEO Jimmy Cayne said he expected the deal with Citic Securities to close within 120 days. Mr Alan Schwartz replaced Mr Cayne in January.

Bear had expected to be the first foreign bank to invest in a Chinese broker after China's government last month lifted a two-year regulatory ban against such investments.

Now rivals Morgan Stanley or Citigroup may be first as they pursue ventures with local partners that are less complex.

Bear has been doing business in China since the early 1990s, but its impact has been small. Since 2000 it has been an adviser on just seven China and Hong Kong deals totalling US$1.64 billion in value, according to Dealogic. -- REUTERS