Mon Aug 31, 2009 2:04am EDT
BEIJING, Aug 31 (Reuters) - A weekend report that Chinese state-owned companies will be allowed to default on commodity derivative contracts provoked anger and dismay among investment banks on Monday as they feared a damaging precedent.
China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), has 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. [ID:nLT454907]
A SASAC media official said he was waiting for the "relevant department's" official comment before he can clarify to media.
The report, the hot topic among bankers from Shanghai to Singapore on Monday, deals another blow to investment banks hoping to sell more derivatives hedges in China, the world's fastest-expanding major economy and top commodities consumer.
"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, government or corporate? And under what reasons for possible defaults?" said a Singapore-based marketing executive with a foreign bank.
"If it's in the name of the government, the impact will be very negative," said the executive, who did not want to the named due to the sensitive nature of the matter.
Commodities derivative marketing officials at JPMorgan Chase (JPM.N) and Morgan Stanley (MS.N) declined to comment.
But at least Air China (601111.SS)(0753.HK), China Eastern (600115.SS) and shipping giant COSCO (1919.HK) -- among the Chinese SOEs mired in huge derivatives losses since late last year -- had issued letters to banks, said the Singapore-based bank source, who said he had heard of the letters and that they were all in the same format.
"It's a handful of companies who are being encouraged by regulators to re-negotiate. It's outrageous, but it's China so everyone is treading very carefully," said a second banking source.
Beijing-based derivatives lawyers said the so-called "legal letter" has no legal standing -- SASAC as a shareholder of SOEs has no business relationship with international banks.
No bank names were reported in the Caijing report. The SASAC media officer also declined to specify any.
SASAC took over the job of overseeing SOEs' derivatives trading from the securities regulator in February after several Chinese firms reported huge losses from derivatives.
For a factbox of China's derivatives debacles [ID:nPEK206094] (Reporting by Eadie Chen and Chen Aizhu in Beijing, Alfred Cang in Shanghai, George Chen and Michael Flaherty in Hong Kong; Editing by Michael Urquhart)
Further......
BEIJING, Aug 29 (Reuters)— Chinese state-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, a leading financial magazine said.
China's SOE regulator, the State-owned Assets Supervision and Administration Commission (SASAC), had told the financial institutions that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying."
On September 1, 2009 Reuters said that the Banks (as guarantors) would be at risk if China followed through.
3 of these banks are JP Morgan, Goldman Sachs, and UBS.
We could all dream this would happen to these banks, and the banks could wield those lawyers all they want, but the fact remains is that China holds the power here, and at anytime could do the unthinkable if its wanted to. I mean what were these banks thinking selling garbage (toxic laden derivatives marked as AAA) to everyone anyway, let alone to one of our largest buyers of US debt ?
What goes around, comes around. Good luck GS, JP, and UBS. Perhaps these are some worthwhile shorting opportunities ????
