September 1, 2009 / 8:55 AM / 10 years ago

China targets some, not all, derivative deals: source

BEIJING (Reuters) - A reported warning over defaults on derivatives deals with state-owned Chinese corporates was meant to address specific “problematic” contracts, not the industry as a whole, a government source told Reuters on Tuesday.

The comments appeared to play down concerns of widespread defaults on over-the-counter hedging deals, which had been raised by a weekend report that the State-owned Assets Supervision and Administration Commission had told six foreign banks that state firms reserved the right to default on OTC contracts.

The report on Saturday in the Caijing financial magazine, quoting an unnamed industry source, triggered anger and dismay among investment banks, and a momentary panic over the possibility of defaults on commodity imports or heavy position unwinding, although bankers said both were unlikely.

On Tuesday, Beijing-based officials and analysts said that SASAC, the regulator and nominal shareholder for state-owned enterprises (SOEs), appeared to be stepping up the pressure on foreign banks to allow corporates to exit specific deals that may have been too complex for the companies to understand.

“The move is not meant to cover a comprehensive range of businesses and companies. It’s mainly to deal with some problematic contracts that were signed before, especially those that might have insufficient information disclosure or two parties have disputes over certain details,” a government official with knowledge of the issue told Reuters.

The official declined to be named due to the sensitive nature of the issue.

It was not immediately clear which commodity contracts were covered under the warning, and no foreign banks were named.

Chinese airlines and shipping companies have reported huge paper losses on derivative hedges that turned negative when commodity markets plunged late last year.

A Singapore-based bank source said on Monday that Air China 60111.SS(0753.HK), China Eastern (600115.SS) and shipping giant COSCO (1919.HK) had issued almost identical notices to banks, although a China Eastern executive and an Air China spokesperson both said on Tuesday that they were not aware of the issue.

Beijing’s unusual stance pressured U.S. gold and soybean futures on Monday, as traders feared banks may be forced to unwind over-the-counter deals, although bankers on Tuesday said the contracts would not be large enough to trigger losses.

“My initial reaction (to that report) is our government took an irrational stance. But...I believe the impact should be limited,” said Hu Yuyue, head of Securities and Futures Institute of Beijing Industry and Commerce University.

“It could target at some ‘toxic assets’ that even the U.S. government wants to rid of. If these deals are deemed ‘toxic’, should China have the right to end them?”

Reporting by Eadie Chen and Chen Aizhu; Editing by Jonathan Leff

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