Morgan Stanley is in talks to buy a stake in DHI-DCW Group, one of China's biggest heavy equipment makers, despite recent government attempts to tighten foreign investment in the sector, the South China Morning Post reported, citing a local government official.

Three private equity funds, including one from Morgan Stanley, have approached the municipal government-owned equipment maker about buying a stake, the Hong Kong newspaper reported citing Wang Chun, a director with the city's State-owned Assets Supervision and Administration Commission.

The two other companies were from South Korea and Hong Kong, she said, without revealing company names.

DHI-DCW is also studying a plan for a Hong Kong listing to raise up to 700 mln hkd over the next 12 months, and BNP Paribas Peregrine has been conducting due diligence on the firm, the report cited Wang as saying.

There was no information available on how large a stake Morgan Stanley might seek, the newspaper added.

Foreign investors are rushing into China's machinery-making sector, although Carlyle Group's planned 375 mln usd bid for an 85 pct stake in Xugong Construction Machinery, the biggest deal so far, is still awaiting approval from the Ministry of Commerce months after an agreement was signed.

The State Council said last week that mainland firms should retain control over the country's heavy machinery industry, and the central government must be consulted in all large equity sales to foreigners.