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POLITICAL ECONOMY
China slams foreign banks over derivatives losses

China raises capital requirements for banks: regulator
Shanghai (AFP) Dec 4, 2009 - China's banking watchdog has tightened capital requirements for banks amid concerns rampant lending will lead to a sharp rise in bad debts, state media reported Friday. Wang Zhaoxing, vice chairman of the China Banking Regulatory Commission, said the minimum capital adequacy ratio for large banks -- the amount of capital banks must hold against their risk -- has been raised to 11 percent. The capital adequacy ratio was previously set at a minimum of eight percent. The move was in response to the "changing macroeconomic situation," Wang wrote in the latest edition of the central bank-backed China Finance magazine. Wang did not say when the new rules came into effect.

"The intention is to ask banks to convert more earnings into capital and provisions ... in order to withstand potential risks in the future," Wang said. The regulator has told small- and medium-sized lenders to maintain a capital adequacy ratio of at least 10 percent, he said. The watchdog last month issued a rare warning that it will impose curbs on banks unless they strengthen their defences against bad loans as Beijing tries to put the brakes on record lending. Those that fail to comply will face "restrictions on market access, overseas investment, and outlets and business expansion," the regulator warned. New bank loans reached 7.4 trillion yuan (1.1 trillion dollars) in the first half of the year, hitting a record 1.89 trillion yuan in March, as banks heeded Beijing's calls to pump money into the world's third largest economy. The figure declined significantly to 355.9 billion yuan in July before rebounding in August and September amid concerns that much of the money had been funnelled into stocks and property at the risk of spiking asset prices.
by Staff Writers
 Beijing (AFP) Dec 4, 2009
 China has accused several foreign investment banks of "maliciously" selling derivative products to dozens of state-owned companies, which then booked more than 11 billion yuan in losses on the deals.

The losses were "closely associated with the intentionally complex and highly leveraged products that were fraudulently peddled by international investment banks with evil intentions," said Li Wei, vice chairman of the State-Owned Assets Supervision and Administration Commission (SASAC).

"To some extent some international investment banks were the chief culprits and the root of ruin for the Chinese enterprises who encountered this financial derivatives Waterloo."

Li singled out Goldman Sachs, Merrill Lynch, Morgan Stanley and Citigroup in the article published in the latest edition of the Study Times, an official Communist Party newspaper.

He said 68 of the more than 130 companies controlled by SASAC bought derivatives to hedge against rising commodity prices and fluctuating exchange and interest rates.

These companies, including major airlines, incurred paper losses of 11.4 billion yuan (1.67 billion dollars) on the 125 billion yuan worth of derivative contracts bought by the end of October 2008, he said.

But Li said state-run firms should not "give up eating for fear of choking", noting derivatives offered opportunities to hedge against potential risk and companies will find it hard to compete with foreign rivals without them.

He urged these companies to comply with regulations and make sure any investments in derivative products were done to hedge risk rather than speculate in the market.

The regulatory watchdog said in September it would support state-owned companies that take legal action over the heavy losses.

The agency said at the time some firms had already notified foreign banks that they were considering legal action over contracts for oil-related structured options.

SASAC ordered state firms in March to reconsider their derivative investments overseas and back out of high-risk contracts after several Chinese firms reported huge losses.

State-owned carriers Air China, China Eastern and Shanghai Airlines reported losses of almost two billion dollars since last year on aviation fuel hedging contracts.

In August, Caijing magazine reported, citing an unnamed state enterprise executive, that only 31 state-owned firms were licensed to enter into such deals, while many more were apparently doing so.

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