State firms lose ¥11.4b

08:19, December 04, 2009      

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Sixty-eight central State-owned Enterprises (SOEs) have suffered a net floating loss of 11.4 billion yuan ($1.67 billion) in the past decade, especially in recent years, due to their reckless investments in international financial derivatives, a new report by the State asset-management authority said.

The report, published Monday by the Study Times and run by the Party School of the Central Committee of the CPC, was written by Li Wei, vice director of the State-owned Assets Supervision and Administration Commission of the State Council (SASAC).

According to the report, 68 SOEs were engaged in financial derivative products, including commodities futures, swap rates, interest-rate swaps, options and structured deposits.

By the end of October 2008, the total market value of the derivative products that the SOEs had invested in reached 125 billion yuan, while the net floating loss reached 11.4 billion yuan, including 13 million yuan in losses from investment in domestic derivatives and 11.27 billion yuan in overseas markets.

The report suggested that among the 68 SOEs, 26 were ones that were trading in derivatives abroad without government approval, and they arbitrarily signed nonstandard contracts with foreign banks, which involved huge risks and lacked transparency.

The most notorious case emerged in January when several high-profile SOEs such as Air China, China Eastern and China COSCO reported massive losses on options contracts offered by foreign banks such as Goldman Sachs, Merrill Lynch and Morgan Stanley.

With the burst of the oil bubble last year, the three companies announced losses totaling 6.2 billion yuan (for China Eastern) 6.8 billion yuan (for Air China) and 3.1 billion yuan (for COSCO).

However, experts said the case probably represents only the tip of the iceberg. An unnamed source at a major SOE told Caijing magazine in September that most State-owned companies with import-export and foreign exchange businesses are more or less involved in derivatives trading.The report attributed speculative motives, lack of risk control, a flawed corporate governance structure, illegal practice in derivative trading and an absence of cutting-edge financial professionals in SOEs to their massive losses in the dealings.

It also suggested that foreign investment banks are the biggest culprits in creating the losses for these Chinese enterprises by taking advantage of their inexperience in investing in high-risk derivatives.

Eight SOEs invested in interest swaps recommended by foreign investment banks, which featured complicated designs, long contractual terms and huge risk exposure, with one of them involving six models that could not be interpreted by professionals excelling at math.

Jiang Tao, an expert on futures transactions with Guotai Jun'an Securities, told the Global Times that some SOEs have been motivated by desire for profits from speculative investment in derivatives.

Although the SOEs are entitled to invest in financial derivatives, government regulations have made it clear that SOEs are only allowed to invest in hedging trading but not other futures products.

"They are dying for profits while overlooking risk management, sustainable development and state regulation," Jiang said.

Source:Global Times

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