Default on derivitives by China

[ironlady]

Government Involves Itself in SOE Fuel Derivative Defaults

Last year's commodity price plunge caught a number of Chinese state-owned enterprises (SOEs) flat-footed and they suffered huge losses in fuel hedging derivative trading with international investment banks. Both the SOEs and regulators are straining to explain the debacle, and there are even indications they are inclined to blame fraud and/or conspiracy by foreign investment banks.

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There has been no news in response from counterparties. It is reported that at least six international investment banks may be involved in the case. Goldman Sachs is the largest "banker" for oil derivative trading.

http://www.chinastakes.com/2009/9/go...-defaults.html

[Camtender]

Re: Default on derivitives by China

http://seekingalpha.com/article/1602...ticle_sb_picks

China’s stop-loss
Last week, China released some rather earthshaking news that was barely reported by the diligent media here in the US. And where it was reported, the significance was completely glossed over or even ignored. The Chinese Government gave a directive to its state banks to cut their losses on commodity related derivatives, many of which are tied to NY and London banks. In doing so, the Chinese government is in essence saying it no longer respects the validity of these specific performance contracts, pointing out that without performance, there is nothing special about the contracts. This is tantamount to a shot across the bow. The commodities portion of the total notional value of all OTC derivatives as of December 2008 is rather small at .75% of the total. Telling Wall Street to take a long walk off a short pier in this instance will probably not destroy the financial system in and of itself, but it will certainly give the bailout boys a hint of what could happen if the Chinese et al (think BRIC) start backing out of other more important areas such as interest rate swaps which were nearly 55% of the total notional value. (Data courtesy of BIS)

[click to enlarge]

Even the most diehard of Keynesians, who have never seen a deficit they didn’t love, are aware of the fact that it is much more favorable to have foreign cooperation in your currency burying than to have to do it on your own with direct (or around the woodpile) monetization. In that regard, they still need the Chinese if for nothing else than maintaining the façade of vendor financing and the maintenance of the status quo.

Stock markets reacted poorly to the news last Tuesday with the Dow losing nearly 200 points on a day where there was a bevy of ‘green shoots’ economic news in the form of ISM manufacturing data, pending home sales, and motor vehicle sales. Financial stocks led the decline and we must wonder if the smart money had its eyes on the Chinese as the day progressed. On Wednesday, Gold broke out of its recent doldrums and immediately headed north. Granted the technical patterns had been predicting the breakout for the past few weeks, but it is rather coincidental and we have to ask if we are not beginning to see the first shockwave from the recent Chinese action? If so, Gold gets a big thumbs up, while paper assets get the boot.

[Spartacus]

Re: Default on derivitives by China

who on the Chinese side lost, exactly?

shorts, longs, or both?

with the amount of naked shorting that's allowed on US commodity markets, and the opacity of these markets (why are they not as transparent as for stocks & bonds?) IMHO anyone would be an absolute fool to take long leveraged positions there

Government Involves Itself in SOE Fuel Derivative Defaults

Last year's commodity price plunge caught a number of Chinese state-owned enterprises (SOEs) flat-footed and they suffered huge losses in fuel hedging derivative trading with international investment banks. Both the SOEs and regulators are straining to explain the debacle, and there are even indications they are inclined to blame fraud and/or conspiracy by foreign investment banks.

fficeffice" />

There has been no news in response from counterparties. It is reported that at least six international investment banks may be involved in the case. Goldman Sachs is the largest "banker" for oil derivative trading.

http://www.chinastakes.com/2009/9/go...-defaults.html