Posted on 08/31/2009 10:31:34 PM PDT by FromLori
A report that Chinese state-owned companies will be allowed to walk away from loss-making commodity derivative trades provoked anger and dismay among investment bankers on Monday as they feared it may set a damaging precedent.
The State-owned Assets Supervision and Administration Commission, the regulator and nominal shareholder for state-owned enterprises (SOEs), told six foreign banks that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying in an article published on Saturday.
While the details of the report could not be confirmed, it was Monday's hot topic in financial circles from Shanghai to Singapore as commodity marketers feared that companies holding underwater price hedges could simply renege on the deals, costing banks millions of dollars in profit.
The warning from SASAC follows a series of measures from Beijing this year to crack down on the sale of derivative products by foreign banks to Chinese enterprises, principally big consumers, who bought protection against higher prices last year only to watch the market collapse -- leaving them with losses. While many companies including top airlines have come clean on the losses, some analysts fear another wave may follow.
"I wouldn't be surprised if more state firms emerge with big derivatives trading losses, otherwise SASAC wouldn't come out with such a radical move," said a Hong Kong-based derivatives analyst, who like most other industry officials and bankers declined to be named due to the high sensitivity of the issue. A SASAC media official said on Monday that he was waiting for the "relevant department's" official comment before he can clarify to media. A government official said that the Bureau of Financial Supervision and Evaluation under SASAC was handling the issue. The official declined to be named and did not elaborate. Spokespersons at Goldman Sachs and UBS declined comment, and media officials at Morgan Stanley and JPMorgan were not immediately available for comment. All are major global providers of commodity risk management.
No bank were named in the Caijing report. The SASAC media officer also declined to identify any specific banks. "It's a handful of companies who are being encouraged by regulators to re-negotiate," said a second banking source. "It's outrageous, but it's China, so everyone is treading very carefully." For banks that are hoping to sell more derivatives hedges in China, the world's fastest-expanding major economy and top commodities consumer, the danger goes beyond the immediate risk to existing contracts to the longer-term precedent that suggests Chinese companies can simply renege on deals when they like.
The report follows an order from SASAC in July that required all central government-controlled state companies engaged in trading derivatives to make quarterly reports about their investments, including details of holdings and performance.
But the reported letter opened several important questions that could not immediately be answered. "If we were among the banks receiving that letter, we would be very angry. But now the key is to find out more details on the letter: In whose name the letter was issued, the government or the corporate's? And under what was the reason for defaulting?" said a Singapore-based marketing executive with a foreign bank.
The source, whose bank did not receive a letter, said that Air China, China Eastern and shipping giant COSCO - among the Chinese companies that have reported huge derivatives losses since last year - had issued almost identical notices to banks.
"If it's in the name of the government, the impact will be very negative," said the source, who declined to be named. Beijing-based derivatives lawyers said the so-called "legal letter" has no legal standing -- SASAC as a shareholder has no business relationship with international banks.
"It's like the father suddenly told the creditors of his debt-ridden son that his son won't pay any of his debt," said a lawyer from the derivatives risks committee of the Beijing Lawyers Association. (C ) Reuters
Everyone listen up and start watching for this word
NATIONALIZATION
China's about to start playing some trump cards. Lots of pretty R&D facilities and plants in China.
Yuan global currency? That pig stiglitz wants it.
http://www.washingtonpost.com/wp-dyn/content/article/2009/08/28/AR2009082802111_2.html?sub=AR
http://market-ticker.denninger.net/archives/1388-An-Ill-Wind-Blows-From-Japan.html
http://www.financialsense.com/fsu/editorials/willie/2009/0729.html
me laugh at those US banks trying to sell junk securities to China and now won’t get their money on junk
This recession is going to last a long time. We will not be back to the ‘Good Old Days’ very soon, because we cannot sustain the model that pumped up the economy for the last few decades. Banks simply don’t have the money to create that kind of bubble again and if they did, they are more selective and cautious in who they loan it to. Obama’s economic policies will only provide stagnation in the long term because of his huge deficits and the burden that this will place on Everyday Americans in the form of higher taxes and higher interest rates compounded also by high unemployment. We are in for a much worse funk than we had with Jimmy Carter.
obama 08=DEPRESSION 09 not just a bumper sticker anymore
Yes. I made the last post on that thread at 9:11pm tonight, thanks.
Heads I win, Tails you lose.
Ping!
Bwahaaa So much for the “strategic partnership” with China.
Suckers.
LOL is right!
Well, you won’t be laughing long, when this action starts the meltdown of the world economies. You will see a depression that will make 1929 look like nothing.
The big unwinding is starting and they can’t stop it.....women and retailers hit hardest!!!
Hey, we can’t be in a depression! I haven’t finished my countdown yet. ;-)
Thanks for the ping.
CHina, doing the job Americans won’t do...
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