China Has Already Walked Away from Derivatives Contracts

You’ve probably heard that China has threatened to walk away from certain commodity derivatives contracts.

As Reuters reported in August:

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.

But as Janet Tavakoli noted in January, Chinese banks already walked away from derivatives contracts last year:

In early November [2008], Chinese banks (top tier banks like Bank of China and Industrial and Commercial Bank of China) refused to fork over billions in collateral on dollar/yen FX trades which were out of the money after the yen’s October appreciation. The headlines should have read (but didn’t): “Chinese Banks say: STUFF IT.” The Chinese banks won a game of drag race “chicken” with foreign banks. Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties, and they renegotiated contracts with the Chinese banks.

Today, Tavakoli wrote a fantastic and hard-hitting post for Zero Hedge:

In November 2008, Chinese banks said they would no longer play by our rules. Top tier banks (Bank of China and Industrial and Commercial Bank of China) reneged on derivatives contracts. They failed to come up with billions in collateral on dollar/yen FX trades, which were out of the money after the yen’s October appreciation. This should have been headline news in every financial newspaper, but it wasn’t.

Chinese banks defaulted. They may have been partially motivated by U.S. malfeasance in the capital markets that caused losses in Asia. The U.S. squandered its credibility and our cover-ups have done nothing to restore it.

Most credit support annex agreements would say that closing out these trades would be an event of default, and then the cross default on all the trades would kick in with the same counterparty. But the credit of the Chinese banks was better than many of their counterparties. Everyone was forced to renegotiate contracts with the Chinese banks.

From the perspective of the derivatives markets, this is earth shattering. What would have happened if AIG had done the same thing? (Hey, Goldman, UBS, and others…you want your collateral? Well…Stuff It!)

At the end of August 2009, China signaled that state owned oil consumers: Air China, COSCO, and China Eastern could default on money-losing commodities derivatives contracts.

If we had been paying attention, the U.S. should have done everything in its power to correct our mistakes, clean up the mess in our financial system—instead of sweeping it under the carpet—and turned our efforts to maintaining the credibility of the capital markets and the credibility of the dollar.

See this for background.

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  • http://Anonymousnoreply@blogger.com Anonymous

    Musical chairs is a really fun game,,,,unless you are the one without the chair when the music stops..

  • http://Anonymousnoreply@blogger.com Anonymous

    but the dow jones industrial average ( aka "the stock market" ) is SKYROCKETING today tuesday 6 october 2009 so it is all good and who gives a sh*t about derivatives and the red communist chinese and DID YOU HEAR THE GREAT RECESSION IS OVER SO GET BACK OUT THERE AND BUYBUYBUY GOINDEBT GOINDEBT GOINDEBT.that is all.

  • http://Anonymousnoreply@blogger.com Anonymous

    you are not talking about a default . When a contract is out of the money the holder has two options : he can forward more money or refuse to do it . If he refuses it is not a default , the counterparty must close the contract or asume the risk . A default is when you owe money and refuse to pay it . In this case chinese institutions simply refused to continue playing .Thats all . Any investor who is out of the money can do the same .

  • http://www.blogger.com/profile/08454222098667643650 Tom Hickey

    Glad to see Tavakoli lending cred to ZH. Plus she slams the traditional media for missing the news or burying it.The times, they are a-changin'.

  • http://www.blogger.com/profile/18243721618604735426 Tom

    I can't blame China for walking away from these contracts, but I would have more respect for their wisdom if they had refused to play the derivatives game from the get-go. People who know how to create wealth by manufacturing real goods (and the Chinese do) shouldn't need to stoop to financial casino games. Leave that to the worthless Wall Street hucksters who couldn't make an honest product if their kids were starving.

  • http://Anonymousnoreply@blogger.com Anonymous

    Screw the chinese and the Bush/Obama Global Terrorist Crime Cartel to…

  • http://Anonymousnoreply@blogger.com Anonymous

    America must have fallen they wont let me say screw the russian/chinese communists and their puppets the bush/obama global terrorist crime cartel that licks their boots

  • http://Anonymousnoreply@blogger.com Anonymous

    Time never changes it's always right now

  • http://Anonymousnoreply@blogger.com Anonymous

    anyone with half a brain saw this coming for years. . .student loans quadrupled, housing prices doubled and tripled, medical costs skyrocketed. . .and no one was getting better, more efficient or more value it was just costing a lot more. . .this was wrong.but no one payed attention to the few who felt the pain and sounded the alarm. "this is the land of opportunity" not if you have a debt that you can't pay hanging over your head. Not if your credit score is in the toilet. . .this country is again the land of opportunity for the white upper class land owners. . .the rest of us are indentured servants in one form or another.

  • http://Anonymousnoreply@blogger.com Anonymous

    The toxic crap made in China is made by Chinese slaves;but soon under the Bush/Obama Global Terrorist Crime Cartel you to can work 16 hours a day for a cup of rice…Unless of course you have a government job as a concentration camp guard;then you receive 2 cups of rice a day…

  • http://Anonymousnoreply@blogger.com Anonymous

    just thinking aloud…have heard and read a ot of people saying that chines are slave labor and as mentioned in one of the comments here, " working for a cup of rice a day"…when u r out of work u work. period. for the best offer in return.now in a developed society economy, as the entire west and some others, there is minimum wage and benefits and social welfare etc etc. this is brilliant and esp for te avergae person who is honestly working hard for his time.but where does one draw the line and how to define. does having a social welfare entitle me to a free couch and a TV spot for the day. because of the benfits and assurances are we becoming less worried and hardworking..i have heard and seen enough people also who just dont work as hard as a chinese fpr example. they cant wait for friday to come so that they can rush off on that weekend trip on that rented boat paid for by non existent money (credit card)…so who is right. or rather let me say. are both the sides missing the balance? it is good to have the benefits and fallback options but have we gone beyond taking them for granted! should that chinese slave labor start to charge more for his work, actually in china because of the govt dunno if one can do that! but the point being where is the mean. i dont think keeping on saying the chinese slave labor brought down our world and value…is not that the defining pegs of competition; "value for money"…so WHO IS TO BE BLAMED? OR IS IT A MATTER OF MAYBE BOTH ARE WRONG AND BOTH ARE RIGHT….?

  • http://Anonymousnoreply@blogger.com Anonymous

    In answer to your question… blah blah blah

  • http://Anonymousnoreply@blogger.com Anonymous

    chinaman walk away from my usa… idont care about the rich whores that said you own my land

 

 

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