China's SOEs May Terminate Commodities Contracts

Any such move would be a major blow to investment banks which service commodities hedging operations for Chinese SOEs on the international market.

(Caijing.com.cn) China's state-owned enterprises may unilaterally terminate commodities contracts as they try to cut massive losses from financial derivatives, an industry source told Caijing on August 28.

According to the source, China's State-owned Assets Supervision and Administration Commission (SASAC) has sent notice to six foreign financial institutions informing them that several state-owned enterprise will reserve the right to default on commodities contracts signed with those institutions.

Keith Noyes, an official with the International Swaps and Derivatives Association, a trade organization, confirmed that he is aware of the matter, but provided no further comment.

Foreign brokerages usually work through their Hong Kong operations to sign over-the-counter derivative hedging contracts, according to an investment banker whose firm is involved in the business. Hong Kong and Singapore usually serve as venues for arbitration over such transactions.

Most investment banks may "just swallow" any losses arising from canceled contracts, the executive said, adding that any losses are usually made up for with compensating trades.

Investment banks "just earn less" from such transactions, he said.

But any such move would be a major blow to investment banks which service massive commodities hedging operations for Chinese SOEs on the international market, said the executive.

Chinese SOEs have suffered massive losses from hedging contracts since the onset of the global financial crisis. SASAC and the National Auditing Office has been investigating derivatives positions trading since the beginning of the year.

A source from a state-owned company told Caijing that most of China’s SOEs engaging in foreign exchange and international trade have participated in derivatives trading, involving capital topping 1 trillion yuan.