The leading foreign investor in the Chinese company embroiled in a legal spat with Morgan Stanley over derivatives is Goldman Sachs, the US investment bank’s arch rival.

Morgan Stanley and China Haisheng Juice Holdings are battling in English and Chinese courts over a disputed hedging contract.

The case is the most public example to date of the stand-off between foreign investment banks and mainland companies over derivatives deals, which has resulted in a collapse in such structured product deals in China this year.

Goldman Sachs made its first investment in Haisheng in early 2005 and its private equity arm now holds 20 per cent of the Chinese company’s Hong Kong-listed shares.

Goldman’s investment in Haisheng is understood to be passive and it does not have a board seat or provide financial advice to the privately-founded Chinese company.

In London, Morgan Stanley is pursuing $26m it alleges it is owed after Haisheng failed to post collateral relating to the renminbi-dollar hedges. The Chinese company is suing the US bank in a provincial mainland court for allegedly mis-selling the hedging contracts.

While Goldman’s private equity unit would benefit from Haisheng winning the dispute, the US group could suffer on a wider level as a Chinese victory would be likely to embolden local action against foreign banks. Many global banks are in dispute with Chinese companies over derivatives deals. Goldman itself is negotiating with Shenzhen Nanshan Power, a mainland utility, to settle a contractual dispute relating to oil derivatives contracts.

Goldman and Morgan Stanley declined to comment.

Beijing authorities want to clamp down on the over-the-counter derivatives markets after a raft of state-owned companies made disastrous bets on currency and commodity movements. As a result, the amount of derivatives business being conducted by global investment banks in China has fallen by about 75 per cent this year, according to overseas groups.

Chin-Chong Liew, a senior derivatives lawyer at Linklaters in Hong Kong, said that the cross-border derivatives business had plummeted, amid the disputes and the general economic slowdown.

However, he added: “Lessons are being learned by all sides and China will again represent a major market in derivatives as soon as these issues subside.”

Ironically, many of the derivatives contracts that caused such large losses at Chinese companies have become profitable just as some of the disputes are being brought to court, thanks to resurgent commodity prices and the falling US dollar.

China’s three largest airlines all returned to profit in the third quarter, partly due to a rise in jet fuel prices which allowed them to reverse-hedging losses they made last year.