China is Pissed….U.S. Banks to Blame
December 4, 2009 11:20 am
China is already aggravated by our protectionism strategies and by the suggestion that they are involved in currency manipulation. Now they are looking for some payback.
Dec. 4 (Bloomberg) — A Chinese official said “fraudulent practices” by some foreign investment banks were partly to blame for more than 11.4 billion yuan ($1.67 billion) of derivatives losses at Chinese state-owned companies last year.
“Some international investment banks were the culprits behind the derivatives Waterloo suffered by Chinese companies,” Li Wei, vice chairman of the State-owned Assets Supervision and Administration Commission wrote in an article in the Study Times, a newspaper published by the Party School of the Central Committee of China’s Communist Party. The state assets commission oversees companies owned by the central government.
Sixty-eight companies including China Eastern Air Holding Co. and China National Aviation Holding Co. lost money on derivative products sold by banks including Goldman Sachs Group Inc., Morgan Stanley, Merrill Lynch & Co. and Citigroup Inc., Li wrote in the Nov. 30 article. He didn’t say which banks may have used fraudulent practices.
Spokespeople at Goldman, Morgan Stanley, Merrill Lynch and Citigroup either declined to comment or weren’t immediately available.
State-owned companies bought contracts linked to the price of oil and interest-rate swap products, Li wrote. The losses of 11.4 billion yuan were as of October last year, he added.
The companies’ pursuit of large profits, the complexity of the derivatives contracts, poor corporate governance and risk management at the companies and a lack of sufficiently trained staff helped aggravate losses, Li wrote.
State-operated enterprises should use derivatives to hedge against losses, lock in future profit and minimize risks, Li said in the newspaper. Companies should be careful not to use derivatives to speculate, he wrote.
Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published.