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In a statement unveiled on September 7, the State-owned Assets Supervision and Administration Commission (SASAC) told foreign commodity hedging service providers that the state-backed players involved in commodity hedging operation were entitled to unilaterally default on derivative contracts signed previously, a move that would enable traders to shy away from possible risks.
The company has put an end to the contracts that are due to expire in July 2011 after an internal discussion, said an executive for China Eastern later on the day. "It will be subject to the decision of the SASAC," according to the executive, when asked if the company enter into commodity hedging contracts that will take effect in 2011.
The SASAC succeeded local securities regulators to oversee state-owned companies' financial derivative trading after February, when plenty of the air carriers in the country suffered significant losses from aviation fuel hedging business. In January, Air China, Shanghai Airlines, and China Eastern, the top-ranking air carriers in the country, incurred book losses of nearly USD 2 billion on aviation fuel hedging contracts, as crude oil price dropped sharply after the financial crisis took its toll on the global economy.
China Eastern, the country's third biggest air carrier, reported CNY 2.794 billion in net income from fair value changes in aviation fuel hedging business in the first half of 2009, in contrast to a CNY 6.401 billion loss last year.
Looking ahead, China Eastern will make conducts regarding its commodity hedging business public in the future, said Liu Shaoyong, chairman for the Shanghai-listed company, suggesting domestic firms like China Eastern to beef up their risk management capacity before setting foot in the international capital market.
The SASAC has been guiding state-owned players in the derivative product trading by ordering them to quit risky contracts and report their positions on a quarterly basis.
As early as late 2008, the SASAC had asked state-owned companies to pull out of the overseas futures hedging business to keep away from potential risks. The regulator, which demanded in March 2009 that all state-backed companies should stay out of speculative business, is set to carry out a sweeping investigation to censor state-owned companies' investment in the financial sector.
(USD 1 = CNY 6.83)
Source: www.nbd.com.cn (September 08, 2009)
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