Posted on 09/07/2009 6:26:34 PM PDT by bruinbirdman
China delivered a blow to some of the world’s biggest investment banks on Monday as it declared its support for legal efforts by some state-owned companies that want to break loss-making oil derivatives contracts with foreign institutions.
The state-owned Assets Supervision and Administration Commission of the State Council said it was investigating a number of derivatives deals and would help companies find ways to “minimise losses”.
The move is the latest by Beijing to clamp down on the over-the-counter derivatives market after a number of state companies made disastrous bets on commodity prices and foreign exchange movements, losing billions of dollars.
But it will be greeted with dismay by foreign financial institutions, already reeling from a July decision by China’s banking regulator that sought to prevent state-owned enterprises from accessing the overseas derivatives market through domestic intermediaries.
Andy Xie, an independent economist based in Shanghai, said the moves “pretty much kill this business,” adding that the lion’s share of profits enjoyed by US and European banks in China came from derivatives deals with state-owned companies.
Paget Dare Bryan, head of derivatives at Clifford Chance in Hong Kong, said: “Sasac is flexing its muscles and saying: ‘no more Citic Pacific-style transactions’. It cannot allow [state-owned companies] to go insolvent. It’s protecting them from their own bad trading strategies.”
Citic Pacific, the Hong Kong-listed arm of China’s largest investment conglomerate, is one of many companies where hedging went spectacularly wrong. It reported its first annual loss in March after bets against the Australian dollar in 2008 cost $1.9bn.
In another high-profile case, Air China lost $1.1bn on oil price bets in 2008, accounting for 80 per cent of its total loss that year.
A Chinese regulator was recently quoted by domestic media calling derivatives “financial opium”, comparing them to the lucrative drugs that British traders peddled to the Chinese in the 18th century. “The derivative contracts that some large Chinese firms purchased are very complex,” he said. “They couldn’t even understand what the contracts were about even after incurring huge losses.”
Sasac did not name any state firms of their trading partners on Monday. Mr Dare Bryan said the agency was probably trying to see whether the trades were unenforcable or illegal. “I sense that the first part of that strategy is to renegotiate the transactions rather than walk away from the contracts,” he said.
The International Swaps and Derivatives Association, the trade body of the privately negotiated derivatives industry, under whose terms most contracts are agreed, declined to comment. Its global conference was in Beijing this year.
They break the terms of an ISDA and their name will be mud. No more deals. It’s called default for a reason.
How is welching on bets that cost China money different than the mega-welch that will occur when the US defaults on (or inflates its way out of the real value) of its debt?
Both suck, by the way.
Who is on the other end of these contracts? Goldman Sacks?
If there are provisions that protect against currency fluctuations then they are protected. But someone buying up all our debt, with terms to be paid in the same dollars or other currency are the way it works. Your point about our currency being worthless, or falling however is a good one. Something I am sure many of us here expect from Obama. Great case for shifting assets around.
Didn’t we just read an article a few days ago, about china getting ready to do this, and would be getting out of the dollar, even at a loss???? Not good for the U.S....
Bloomberg’s is running a ticker the dollar dropped to the Japanese yen, .20 Cents!!??? Wow now .23 cents.....24....rut roh.....Oh, nevermind, Obama and Biden said the recovery is working, right?
My expectation of the dollars fall is long overdue. Imagine: Obama and the Fed want to keep rates low. But low rates hurt the dollar. And as the dollar stays low, or falls, people paying dollars for oil find it harder to ink long term deals. Ruh oh, indeed.
Gold just hit $1,000 an ounce...second time in 6 months and 4th time EVER.
Not quite. True, it did reach 1000.80 for the February 2010 Futures contract, but it only hit $999.90 on the December 2009 contract, which is the current actively traded contract. It’s not “official” unless it hits it on the current actively traded contract, i.e. December 2009. It has since fallen to $996.60. Need more volume if there’s going to be an “official” break out above $1000.
Well I am telling you, it was just announced that it hit $1,000 again.
Looks like it did. I’m wondering if hitting $1000 counts as breaching $1000, or if it has to top $1000 to count.
Kitco showing $996.40.
Hong Kong recalls gold reserves from London- Asians invited to store bullion closer home
http://www.freerepublic.com/focus/f-news/2332314/posts
Kitco is best place I know for spot. But also the market is better traded when our markets are open. But so far, today, gold has hit a high of $996.40 (as was already stated).
If they have complaints, they should get a convertible currency.
It's one thing for a company to use derivatives as insurance against currency valuation fluctuations. It's quite another for an entire country to need them.
yitbos
The commies are great at capitalism. They just have a different version than we do. “Heads we win, tails you lose.”
And if western banks and hedgies don’t like it, they can go pound sand.
This reminds me of how the oh-so-terribly bright people at LTCM thought it was impossible that the Russkies would welch on debt deals in 1998. The Russians had no problem with it. Their thinking went like this: “We’re the Russians. Up yours.”
And western PhD’s with Nobel prizes to their names vapor-locked. Couldn’t fathom that a sovereign would do that. Their models didn’t account for it, nor the ensuing flight to safety/liquidity.
Same deal here. The Chinese welch on their side of the contract. So what? What are the western banks and funds going to do? Stamp their gucci-clad feet and pout?
Agreed. Anyone doing business with a Commie deserves what he gets.
The Reds Chinese say they are just "negotiating". With the backing of the state.
The Rooskies haven't done too well since their default.
yitbos
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