December 4, 2009 / 6:25 AM / 9 years ago

UPDATE 1-China blames foreign banks for derivatives losses

(Adds detail, reaction from banks)

BEIJING, Dec 4 (Reuters) - A senior Chinese government official has blamed some of the leading foreign banks for designing complex financial products that triggered losses by state-owned enterprises last year.

Writing in the official Study Times journal, Li Wei, deputy director of the State-Owned Assets Supervision and Administration Commission (SASAC), said 68 Chinese firms suffered net losses of 11.4 billion yuan ($1.67 billion) on call and put options signed with foreign banks.

He blamed Goldman Sachs (GS.N), Citigroup (C.N), Merrill Lynch, Morgan Stanley (MS.N) and other international banks for providing “extremely complicated” and difficult to understand derivatives products.

While SASAC, which manages China’s big state-owned compnies, has previously blamed foreign banks for derivatives losses, this is the first time it has put a number to the size of losses or named banks involved.

Goldman Sachs, Merrill Lynch and Citigroup all declined to comment when contacted by Reuters on Friday. Morgan Stanley did not reply to a request for comment.

Li said China Eastern Air Holding Company, China National Aviation Holding Company and Cosco Group were among the firms that made the losses after the price of oil fell below the exercise prices of the options.

He said by the end of October, the three companies lost 16.1 billion yuan through derivatives trading conducted from June to August. The losses increased to 19.9 billion yuan by the end of the year.

“After the global financial crisis, people mostly think of the United States and other western countries when talking of ‘high leverage to derivatives products’, but there are also domestic enterprises that have been deeply affected,” Li said.

He added that the Chinese companies were equally to blame for the losses, saying they were ill-equipped to handle risk and that their “gambling mentality” had made the situation much worse.

He said many central government enterprises involved in derivatives trading had failed to set up specialised risk management units.

“The problems must of course be identified in the enterprises themselves, but they are also strongly related to the malicious selling of fraudulent, deliberately complicated, highly leveraged products by international investment banks,” he wrote.

However, he added that the losses should not discourage the state enterprises from buying derivative products as Chinese firms would find it hard to compete with foreign rivals without them.

The China State-owned Assets Supervision and Administration in September gave an apparent state sanction for companies to back out of loss-making deals, confirming reports that it may allow state firms to default on some of their oil options trades and even take legal action to minimise losses. [ID:nPEK14474] ($1=6.826 Yuan) (Reporting by David Stanway and Michael Flaherty, Editing by Sambit Mohanty) ((; +86 10 6627 1289; Reuters Messaging: ((If you have a query or comment on this story, send an email to

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