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Derivative deals hit a rough patch

Chinese State-owned enterprises (SOEs) may unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services, Chinese business magazine Caijing reported, citing unnamed sources.

The report said that the State-owned Assets Supervision and Administration Commission (SASAC), China's SOE watchdog, has informed the financial institutions in written letters that SOEs reserved the right to default on those derivative contracts.

Air China, China Eastern and shipping giant COSCO -- among the Chinese SOEs mired in huge derivatives losses since late last year -- have issued letters to banks, Reuters reported yesterday, citing a Singapore-based bank source, who said he had heard of the letters and that they were all in the same format. However, no bank name was mentioned in the report.

The Caijing report, quoting an unidentified SASAC official, said that almost every SOE involved in foreign exchange or trade had some exposure to derivatives such as crude oil, non-ferrous metals, agricultural commodities, iron ore and coal, although only 31 SOEs were licensed to do so.

"If we were among the banks receiving that letter, we would be very angry. But now the key is to find out more details about the letter: In whose name the letter was issued, government or corporate? And under what reasons for possible defaults?" a Singapore-based marketing executive with a foreign bank said in an interview with Reuters.

But Fan Haibo, an analyst from China Cinda Securities, told China Daily that these contracts sold by foreign banks to SOEs could be illegal.

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 Source : Xinhua  Editor: Ivy
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