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Derivatives

State Co. Commodity Losses Could Put Breaks On China Liberalization

China could slow down the liberalization of its derivatives markets in the wake of an expected USD550 million loss in oil derivatives chalked up by a Singapore-based arm of a Chinese state company.

China could slow down the liberalization of its derivatives markets in the wake of an expected USD550 million loss in oil derivatives chalked up by a Singapore-based arm of a Chinese state company.

While the losses were offshore and purely in commodities, the publicity surrounding the losses are likely to make onshore derivatives regulators more skittish, noted market officials. One senior financial official in China told DW the Chinese Securities Regulatory Commission will likely become more cautious. "It's scary," he said. "This is a big loss and the Chinese regulators will definitely be looking into this. It's not a pleasant situation and could slow down the China deregulation process," concurred a senior official at a bulge bracket house.

The next major reform is likely to be the opening up of an onshore renminbi derivatives market, however, officials said the regulators have not fully digested the impact of the Singapore debacle so it is too early to tell how this will affect the planned legislation.

This year the Chinese regulators have introduced a new license, which makes it easier for foreign houses to deal directly with end users (DW, 2/2). Because of this many firms, including Deutsche Bank (DW, 4/18), JPMorgan and UBS (DW, 10/15) have boosted their presence.

Last week jet-fuel supplier China Aviation Oil (Singapore), which is 60% owned by Beijing-based China Aviation Oil Holding Co., announced via its Web site it had racked up USD390 million in losses and anticipates additional losses of around USD160 million when it closes the remaining outstanding positions speculating in oil derivatives.

The firm reportedly sold options at around USD30 a barrel in recent months as well as executed swap positions, but with the oil prices skyrocketing the unit incurred the massive hit. The company is currently working with counterparties to settle the derivative positions.

The company's priority is to finalize restructuring for the derivatives positions, said Gerald Woon, spokesman for AOC (Singapore). Additionally, the company has halted oil derivatives trading and has suspended the duties of Chen Jiulin, ceo. Woon added that speculative derivative positions in the past had been a normal and profitable course of business. Chen could not be reached.

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