China's sovereign wealth fund, China Investment Corp, is planning to increase its stake in Blackstone Group from 9.9 per cent to 12.5 per cent, according to a US regulatory filing.

This time, however, CIC will buy shares in the open market, where Blackstone is trading at a fraction of the price CIC paid in the spring of 2007 just prior to the US private equity group's listing.

By buying shares at greatly reduced prices, CIC is cutting the average cost of its investment. While its original agreement with Blackstone binds the Chinese to hold shares for four years, any new purchases have no such restrictions. At midday on Thursday, Blackstone shares were trading at $8.83. CIC originally paid over $29 a share, a slight discount to the IPO price.

Morgan Stanley analysts estimate the agreement would allow CIC to buy 25 per cent of the current float. With any new share purchases, CIC would also acquire the same voting rights as other holders.

CIC has not been active in the US market in recent months - a reflection of its concern about the value of its investments, including its stakes in Blackstone, JC Flowers and Morgan Stanley, according to people familiar with the matter.

CIC's $5bn investment in Morgan Stanley, made last December, lacked the sort of protection Temasek and the Kuwait Investment Authority received when they invested in Merrill Lynch. Both Temasek and the KIA were granted the right to receive more favorable terms if Merrill extended better terms to subsequent investors.

Following the collapse of Lehman Brothers in mid-September, Gao Xiqing, the executive director of CIC, flew to New York for intensive discussions with John Mack, chief executive of Morgan Stanley, about taking a larger stake in the US investment bank. But the talks ended without an agreement.

Chinese authorities discouraged a larger stake, according to people familiar with the talks, in part because of previous losses and concern about the US dollar. Other Chinese investments, such as China Development Bank's investment in Barclays, or China's State Administration of Foreign Exchange's (SAFE) investment in TPG's latest fund, have also not fared well. As one of the largest investors in the TPG fund, SAFE was among those who received a letter from TPG saying its $3bn investment in Washington Mutual was worth zero.

For the last few months, most sovereign wealth funds have been on the sidelines as the scale of losses mounted. Efforts by Lehman Brothers to find an investor in the Middle East or Asia were unsuccessful.

The revision of the terms of CIC's investment in Blackstone did not require regulatory approval.