Chinese SOEs lose over 11 billion yuan due to derivative exposure

16:04, December 03, 2009      

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Sixty-eight State-owned Enterprises (SOEs) that were exposed to derivative products offered by financial institutions have suffered a net floating loss of 11.4 billion yuan ($1.67 billion) due to their investments in the financial derivatives business.

Li Wei, vice director of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), disclosed the figures in a report published recently.

According to the report, there are 68 SOEs engaged in financial derivative products, covering commodity futures, swap rates, interest rate swaps, and options.

By the end of October 2008, the total market value of the derivative products that the SOEs invested in reached 125 billion yuan, while the net floating loss reached 11.4 billion yuan.

Within the 11.4 billion yuan, 13 million yuan are losses in domestic derivatives, while the remaining 11.27 billion yuan is from investments in overseas markets.

He pointed out that the huge loss should be a severe lesson to those SOEs.

In the report, he also noted that international investment banks are the biggest culprits in creating such big investment losses for these Chinese enterprises.

Also, these SOEs' speculative behavior is a main reason for the loss, Li says. All of those enterprises ignored the huge risks of the derivative products in order to pursue high profits.

But he said that although the enterprises were ignorant of the risks, the great losses they sustained are closely related to some investment banks peddling some deceptive and complex derivative products.

"To some extent, the Chinese enterprises suffered from an investment 'Waterloo' in derivative products; some international investment banks are 'arch-criminals'," he was quoted as saying in the report.

He warned that SOEs should take more caution in developing the derivatives business and improve the risk management of these investments.

Source: Global Times
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