Chinese firms not ready for freer global derivatives trade

May 12, 2015 07:58
CITIC Group offers a cautionary tale about derivatives risks. In 2008, it made mark-to-market losses of nearly US$2 billion on foreign exchange positions to hedge currency exposure. Photo: Bloomberg

Many Chinese state companies recently allowed to freely trade derivatives overseas are being hampered by risks and lack of expertise.

The difficulties are exacerbated by several recent high-profile failures, Reuters reported Tuesday.

Last week China's State-owned Assets Supervision and Administration Commission cleared more companies can trade overseas futures, swaps and options without prior approval.

These are on top of 31 state-owned firms previously authorised.

That will allow such companies to be more efficient by hedging their exposure to changing commodity prices and will also give China more clout in global markets, particularly in oil, gas, coal and metals.

Of the newly empowered companies, 23 are in the energy business or are heavy users of fuels and coal. There are also five steel companies, two nickel and copper miners and several base metals users.

A couple of agricultural commodities firms and some shippers might also want to trade freight forward agreements to lock in profits, industry sources said.

Some companies are already looking to take advantage of the new opportunities.

China National Chemical Corp., which imports about 200,000 barrels of crude oil a day without hedging, was seeking approval from its board of directors to start trading overseas derivatives, a company source said.

"Now that we are qualified, we do want to use the derivatives to control price risks," the source said.

A spokesman at Baosteel Group, China's top steelmaker, also said the company would explore hedging.

Others see a need, but are not ready.

Power company China Huadian has set up a new division to start importing natural gas and would need to hedge but the company currently did not have a team for the imports yet, a company source said.

A source at a Western bank that has trained Chinese clients to trade metals futures said it would take at least six months to teach staff and understand the risks.

There is no shortage of local examples to illustrate the risks.

State-owned Chinese investment company CITIC Group made mark-to-market losses of nearly US$2 billion in 2008 on foreign exchange positions to hedge currency exposure, while commodity buyer the State Reserves Bureau lost more than 900 million yuan ($145 million) on short copper positions in 2005.

Air China, China National Aviation Fuel, and shipper China Cosco Holdings, also suffered heavy losses on derivatives.

The head of futures at a central government-owned company said Beijing had acted in response to rising demand for hedging but the newly enabled companies were aware of the risks and would be cautious.

"Letting the companies do it doesn't mean they will. Conducting the trade does not mean they will have problems, so long as they just hedge physical materials," the person said.

A senior executive at one of the companies said approval was only the first step, and the company would have "serious discussions" before embarking on such business.

-- Contact us at [email protected]