The newly established firm will be named Morgan Stanley Huaxin Securities, the two partners said in a joint statement.
Morgan Stanley will own a one-third stake in the joint venture, the maximum permissible under Chinese law, while Huaxin will own the rest. The registered capital of the joint venture will be 1.02 billion yuan ($157.5 million).
Eight foreign banks including UBS AG
China was the world's top initial public offering market last year with a record $70 billion in IPO proceeds compared with just $9.5 billion in 2008, according to Thomson Reuters data.
China's IPO market, which last year accounted for about 27 percent of global volumes, is currently dominated by local securities firms such as Citic Securities <600030.SS> and Ping An Securities.
The country's bond market has grown three-fold from 2008 to 2010 when it stood at $449 billion.
China has launched a Nasdaq-style start-up board for growth companies and plans to set up an international board as soon as this year to allow domestic listings by foreign companies such as HSBC Holdings Plc
Wang Wenxue, chairman of Huaxin Securities, has been appointed chairman of Morgan Stanley Huaxin Securities, and Yang Kai, a managing director of Morgan Stanley, as chief executive officer.
Morgan Stanley was an early entrant into China when it and other Chinese and international financial firms formed China International Capital Corp (CICC) in 1995. The U.S. investment bank spent only $37 million for its stake in the JV.
After expressing interest in setting up another China JV, it sold its 34.3 percent stake last year to a group of investors including KKR & Co
China's securities rules forbid foreign companies from having more than one joint venture at a time in the country.
(Reporting by Soo Ai Peng; Writing by Kazunori Takada; Editing by Jacqueline Wong)