http://www.theaustralian.news.com.au/business/story/0,28124,26100771-5013584,00.html
The Australian, 21 Sep 2009
Chinese teach banks a lesson with derivative backflip
IF there were any doubts that 2009 was the year when China decided to use its financial clout to influence global economic policies and regulation, then a recent episode will have packed them away.
China's dissatisfaction with a raft of derivatives contracts signed by its large energy companies, mainly for hedging purposes, has been bubbling away for 12 months. Now they have effectively told six of the world's biggest investment banks to go and get stuffed. At the end of August, word got out that a group of China's state-owned enterprises had sent legal letters to the banks saying they reserved the right to withhold payments on commodities derivatives contracts they had bought. The news shook the markets only briefly, but this extraordinary move has potentially enormous implications.
On September 7, the State Assets Commission, the umbrella organisation and single shareholder of China's largest SOEs, announced that it had backed the companies against the banks and that an investigation with the China National Audit Bureau was under way.
Actually, it has been going since last September, so this is no spur of the moment decision. And these are no rogue companies acting independently of the Chinese government. It is the Chinese government's move. According to The Wall Street Journal, China Eastern Airlines, Air China and shipping giant Cosco had sent legal letters to Deutsche Bank, Goldman Sachs, JP Morgan, Citigroup and Morgan Stanley relating to $US2 billion in contracts.
The US government has large shareholdings in some of these banks.
There are two ways of looking at this: from the West's point of view and from China's.
The Western view would say that these are legally enforceable contracts struck in Hong Kong, Singapore and London.
The banks do not believe that China will go to court, but they may be wrong.
The other theme from the West is risk. Coupled with the Rio Tinto affair, is this episode ratcheting up political risk at a time when every global investment dollar is being fiercely fought for? Again, maybe not. The Rio episode, as unfortunate as it remains, appears to have not made much difference where it matters most -- deal-making. China has not stopped investing in Australian resources companies. Quite the opposite -- they have stepped up funding.
From China's point of view, the dodgy and toxic products peddled by investment banks triggered the global financial meltdown.
Like a salesman who sells you a dud car, why should you accept something that doesn't perform as it was supposed to? However, a Chinese business magazine, which published an investigation of the issue this week, suggested that the SOEs may not have the skills to assess risk and are in over their heads when dealing with complex derivatives.
In that case, have the banks taken advantage of them or is it simply a case of caveat emptor?
But it's not that simple, of course, because there is much more than the $2bn at stake for the banks. China is their biggest growth market for decades to come. They all have booming operations in China and most have joint ventures for stockbroking with local Chinese firms.
The Chinese government can pull business from them, make it more difficult for them to operate and even go so far as pulling a licence if it so chooses. This is why we have heard nary a peep from the banks. They know they have been dragged to the negotiating table. If they tell the Chinese government they will see them in court, they can kiss goodbye to any future dealings in China.
That's the rock. The hard place is that if they do negotiate and strike a deal, it opens the floodgates and everyone else with derivatives contracts may try it on, too.
And not just from China. Make no mistake; the rest of the developing world will be watching this one very closely. One of the clear messages that came out of the World Economic Forum meeting in the Chinese city of Dalian two weeks ago was that the developing world very squarely puts the blame for the global recession on the West and they are being forced to bear the brunt of the fallout while the bankers who invested the toxic assets are being bailed out.
China is the de facto leader of the BRIC countries and the developing world. Yet any escalation of the defaults to multiple countries could see a second wave of bank failures and, at the very least, a bad double-dip recession. And that's without the increasingly worrying creeping protectionism around the globe.
China has flexed its financial muscles this year by making a string of public statements suggesting that the world move away from the US dollar as its standard currency, and demanding reforms to the International Monetary Fund.
This latest move is a serious step up.
China is throwing its weight around against the cosseted banks which, backed to the tune of squillions of dollars by governments, run the finance system.
In less than a year it has gone from passive observer to active participant and, oddly enough, a potential agent of reform.
And it wants to teach the banks a lesson that, frankly, the West has been has unwilling to hand out. It could be just what the doctor ordered.
--------------
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The Australian, 21 Sep 2009
Chinese teach banks a lesson with derivative backflip
IF there were any doubts that 2009 was the year when China decided to use its financial clout to influence global economic policies and regulation, then a recent episode will have packed them away.
China's dissatisfaction with a raft of derivatives contracts signed by its large energy companies, mainly for hedging purposes, has been bubbling away for 12 months. Now they have effectively told six of the world's biggest investment banks to go and get stuffed. At the end of August, word got out that a group of China's state-owned enterprises had sent legal letters to the banks saying they reserved the right to withhold payments on commodities derivatives contracts they had bought. The news shook the markets only briefly, but this extraordinary move has potentially enormous implications.
On September 7, the State Assets Commission, the umbrella organisation and single shareholder of China's largest SOEs, announced that it had backed the companies against the banks and that an investigation with the China National Audit Bureau was under way.
Actually, it has been going since last September, so this is no spur of the moment decision. And these are no rogue companies acting independently of the Chinese government. It is the Chinese government's move. According to The Wall Street Journal, China Eastern Airlines, Air China and shipping giant Cosco had sent legal letters to Deutsche Bank, Goldman Sachs, JP Morgan, Citigroup and Morgan Stanley relating to $US2 billion in contracts.
The US government has large shareholdings in some of these banks.
There are two ways of looking at this: from the West's point of view and from China's.
The Western view would say that these are legally enforceable contracts struck in Hong Kong, Singapore and London.
The banks do not believe that China will go to court, but they may be wrong.
The other theme from the West is risk. Coupled with the Rio Tinto affair, is this episode ratcheting up political risk at a time when every global investment dollar is being fiercely fought for? Again, maybe not. The Rio episode, as unfortunate as it remains, appears to have not made much difference where it matters most -- deal-making. China has not stopped investing in Australian resources companies. Quite the opposite -- they have stepped up funding.
From China's point of view, the dodgy and toxic products peddled by investment banks triggered the global financial meltdown.
Like a salesman who sells you a dud car, why should you accept something that doesn't perform as it was supposed to? However, a Chinese business magazine, which published an investigation of the issue this week, suggested that the SOEs may not have the skills to assess risk and are in over their heads when dealing with complex derivatives.
In that case, have the banks taken advantage of them or is it simply a case of caveat emptor?
But it's not that simple, of course, because there is much more than the $2bn at stake for the banks. China is their biggest growth market for decades to come. They all have booming operations in China and most have joint ventures for stockbroking with local Chinese firms.
The Chinese government can pull business from them, make it more difficult for them to operate and even go so far as pulling a licence if it so chooses. This is why we have heard nary a peep from the banks. They know they have been dragged to the negotiating table. If they tell the Chinese government they will see them in court, they can kiss goodbye to any future dealings in China.
That's the rock. The hard place is that if they do negotiate and strike a deal, it opens the floodgates and everyone else with derivatives contracts may try it on, too.
And not just from China. Make no mistake; the rest of the developing world will be watching this one very closely. One of the clear messages that came out of the World Economic Forum meeting in the Chinese city of Dalian two weeks ago was that the developing world very squarely puts the blame for the global recession on the West and they are being forced to bear the brunt of the fallout while the bankers who invested the toxic assets are being bailed out.
China is the de facto leader of the BRIC countries and the developing world. Yet any escalation of the defaults to multiple countries could see a second wave of bank failures and, at the very least, a bad double-dip recession. And that's without the increasingly worrying creeping protectionism around the globe.
China has flexed its financial muscles this year by making a string of public statements suggesting that the world move away from the US dollar as its standard currency, and demanding reforms to the International Monetary Fund.
This latest move is a serious step up.
China is throwing its weight around against the cosseted banks which, backed to the tune of squillions of dollars by governments, run the finance system.
In less than a year it has gone from passive observer to active participant and, oddly enough, a potential agent of reform.
And it wants to teach the banks a lesson that, frankly, the West has been has unwilling to hand out. It could be just what the doctor ordered.
--------------
Latest @ Singaporenewsalternative.blogspot.com
1. Spore-owned SP Ausnet rejected fixing rusty & corroded lines, bush probe revealed
2. US turns up pressure worldwide on banks hiding tax dodgers
3. China teaches western banks a lesson wtih derivative blackflip
4. S'porean entrepreneur turns loss-making Australian carrier to profit
5. Auto system entry into M'sia for frequent Singaporean visitors
6. OPINION: Tiny Singapore knows a thing or three about bubbles
7. Temasek Foundation Pledged US$1.15 Million To Fund Vietnam Technical Courses
Latest video added:
1. Singapore F1 2009 Insights
.
