Opening salvo in a brutal derivatives battle
- Source: caijing.com.cn
- [08:55 September 18 2009]
- Comments
With the permission of the Chinese government's State-owned Assets Supervision and Administration Commission (SASAC), a group of state-owned enterprises (SOEs) have sent legal warnings to six international investment banks over derivatives trade losses, Caijing has learned.
Sources at SASAC, intermediary agencies and investment banks confirmed that the legal documents sent to investment banks in mid-August described Chinese investigations into commodity derivatives contracts bought by SOEs.
SOEs said they reserved the right to withhold payments.
News of possible defaults August 28 jolted commodities markets around the world. On August 31, for example, copper prices for three-month delivery fell 3.6 percent from the previous day on the London Commodity Exchange.
SASAC released more details September 7 on its Web site, announcing that some central government SOEs had written trade counterparts about contracts for oil-related derivative products. The agency said an internal investigation was under way, and that the government reserved the right to devise remedies.
A source told Caijing that, according to incomplete data, 28 central government SOEs were involved in the financial derivatives business in September, and that most had chalked up losses.
On September 9, a Wall Street Journal op-ed piece entitled Beijing Plays Hedge Ball reflected what was widely regarded as the voice of non-Chinese investment bankers. The article emphasized the supreme importance of market rules and contracts, saying Chinese companies that do not comply with contracts or refuse to abide by commercial law would send a wrong signal to the international business community.
The op-ed article said China Eastern Airlines, Air China and COSCO had filed derivatives-related documents with Deutsche Bank, Goldman Sachs Group, J.P. Morgan Chase & Co., Citigroup, and Morgan Stanley involving a combined US$ 2 billion in contracts.
Huang Ming, a finance professor at Cornell University, said Chinese SOEs should pause to reflect on their own corporate governance and risk controls. Also, he said, they should comply with rules of the game, coordinated with fairness and ethical standards.
But an SASAC official told Caijing, "Several billion dollars is not a small amount. How long does it take the SOEs to earn that amount?" The source also said SASAC has a series of strategies to deal with the matter.
SASAC said proper corporate behavior in commercial activities gives the Chinese side the right to resort to legal measures. The agency also said it would pay close attention and support the process, and that relevant SOE trading counterparts should assist in the investigation.
Huang said questions about greedy investment bankers should be considered in reviewing derivatives trading and pricing, and disputes should be handled on a case-by-case basis.
And one investment banker warned that payment defaults are "not worth the cost of a nation's good name."
