China no longer likes the risks associated with the derivatives markets

China delivered a blow to some of the world’s biggest investment banks on Monday as it declared its support for legal efforts by some state-owned companies that want to break loss-making oil derivatives contracts with foreign institutions.

The state-owned Assets Supervision and Administration Commission of the State Council said it was investigating a number of derivatives deals and would help companies find ways to “minimise losses”.

The move is the latest by Beijing to clamp down on the over-the-counter derivatives market after a number of state companies made disastrous bets on commodity prices and foreign exchange movements, losing billions of dollars.

But it will be greeted with dismay by foreign financial institutions, already reeling from a July decision by China’s banking regulator that sought to prevent state-owned enterprises from accessing the overseas derivatives market through domestic intermediaries.

Financial Times article

Markets hit by China commodity default

A report that Chinese state-owned companies will be allowed to walk away from loss-making commodity derivative trades provoked anger and dismay among investment bankers on Monday as they feared it may set a damaging precedent.

The State-owned Assets Supervision and Administration Commission, the regulator and nominal shareholder for state-owned enterprises (SOEs), told six foreign banks that SOEs reserved the right to default on contracts, Caijing magazine quoted an unnamed industry source as saying in an article published on Saturday.

While the details of the report could not be confirmed, it was Monday's hot topic in financial circles from Shanghai to Singapore as commodity marketers feared that companies holding underwater price hedges could simply renege on the deals, costing banks millions of dollars in profit.

read:::Business World