Wednesday, January 14, 2009

Chinese Firms Bought Evil Derivatives Too?

Due to increasing discoveries of losses on derivative instruments (金融衍生品) among state-owned enterprises (SOEs), SASAC and the State Audit Administration are teaming up to conduct an investigation of the financial derivatives activities of large SOEs. (Caijing 14 Jan 2009)

  • China COSCO lost 4 billion RMB on a Freight Forward Agreement.
  • China Eastern Airlines lost 6.2 billion RMB on fuel futures.
  • China Air International lost 3.1 billion RMB on fuel futures.
  • China Railway lost 1.9 billion RMB on currency futures.
Suddenly there is concern that SOEs are using derivatives for purposes other than to mitigate an existing risk. Auditors will be looking for:
  • the extent of derivatives losses on SOE books
  • the impact of derivatives losses on last year's profits
  • the existence of wrongdoing and whether procedures were properly followed.
There was no word on whether those whose derivatives bets paid off would be rewarded.