SHANGHAI (Reuters) - La Compagnie Financiere Edmond de Rothschild Banque plans to buy a 15 percent stake in Chinese fund house Zhonghai Fund Management Co for more than 100 million yuan ($14 million), two sources close to the negotiations said on Tuesday.

The deal, part of the French boutique bank’s strategy to expand in Asia’s fast-growing wealth management markets, follows more than a year of talks with several Chinese shareholders on a possible stake purchase, the sources said.

If the deal is completed, LCF Edmond de Rothschild will become the first foreign private bank to hold a stake in a mutual fund manager in China, where more than 30 Sino-foreign fund ventures have already been established.

An investment arm of state-owned Yunnan Tobacco, which owns 15.385 percent of Shanghai-based Zhonghai Fund, recently agreed to sell its stake to LCF Edmond de Rothschild, although no legally binding documents have yet been signed and the deal is still subject to Chinese regulatory approvals, the sources said.

The Yunnan Tobacco unit is a founding shareholder of Zhonghai Fund, which has about 30 billion yuan of assets under management, and paid about 20 million yuan for its stake in early 2004, the sources said.

“Obviously, it’s not a cheap deal, although Rothschild is very keen to expand in China’s wealth management market,” said one of the sources.

They declined to be identified before an official announcement is made, while senior executives at Zhonghai Fund declined to comment.

FINANCIAL INVESTOR

A representative for LCF Edmond de Rothschild, wholly owned by Baron Benjamin de Rothschild and his family and one of the oldest private banks in Europe, could not be immediately reached for comment.

Other shareholdings in Zhonghai Fund, including those of a unit of CNOOC Group, China’s third-largest oil company, and Guolian Securities Co, would not be affected by the sale.

The CNOOC unit controls the fund house with a 46.923 percent stake, while Guolian Securities owns 37.692 percent.

Foreign banks such as HSBC Holdings Plc HSBA.L0005.HK and JPMorgan JPM.N have also set up fund ventures in China, and about half of China's 60 fund houses are joint ventures.

Many foreign firms, especially European and U.S. fund managers, seek to play an active role in management when they invest in Chinese fund houses, although government rules prevent overseas investors from owning a controlling stake.

The sources said LCF Edmond de Rothschild would be purely a financial investor in Zhonghai Fund with no right to appoint board members or senior executives at the firm.

Zhonghai Fund will tap LCF Edmond de Rothschild’s expertise and networks when it launches fund products investing in overseas markets, especially European bond and stock markets, the sources said.

LCF Edmond de Rothschild operates a representative office in Shanghai and has a Qualified Foreign Institutional Investor license, which allows it to invest in Chinese capital markets, with an investment quota of $100 million.

($1=7.104 Yuan)