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The government is likely to tighten supervision of domestic companies' trading futures on overseas markets after the China Aviation Oil (Singapore) Corp lost US$550 million from speculative trading, company managers and industry experts said.
They said the Chinese regulators would become tougher in forbidding qualified domestic companies from carrying out speculative trading on overseas futures markets.
China Aviation Oil (Singapore), supplier of a third of China's jet fuel, is looking to Singapore's High Court for protection from creditors after losing US$550 million.
The company racked up huge losses in the trading, after it made the wrong bet on the movement of oil prices.
The company, which is listed and headquartered in Singapore but majority-owned by the mainland China Aviation Oil Holding Co, has suspended Chief Executive Chen Jiulin.
It now is seeking rescue from its Chinese parent China Aviation Oil Holding and Singapore State investment agency Temasek Holdings Pte.
A manager from the risk management department of China Minmetals Nonferrous Metals Co Ltd said domestic companies, unlike China Aviation Oil, have not engaged in speculative trading according to the current regulations.
"We are different from China Aviation Oil, which is free from the supervision of domestic regulators," said the manager. "We are not allowed to conduct speculative trading under domestic supervision."
China Minmetals Non-ferrous Metals is one of 17 State companies that are allowed to trade futures in selected overseas futures exchanges.
An official with Sinochem, one of the 17 firms, said the Chinese regulators are expected to become stricter in tightening supervision after the incident.
"The regulators are very cautious," said the official.
A number of State firms began trading in overseas futures in the 1970s. But the business was suspended in the mid-90s after rampant speculation led to a hefty outflow of forex funds and heavy losses for many companies.
From late 2001, the government has gradually started allowing a few qualified foreign companies to trade in oil, grain and non-ferrous metals to resume the business.
The companies may take advantage of overseas futures to hedge the risks of price fluctuations in the international marketplace.
But they are strictly barred from speculative trading.
Li Lei, founder of commodity research company Beijing Derain Inc, said the incident should be a chance for Chinese risk-averse regulators to develop the futures market and at the same time reinforce the supervision system.
"It proves again how dangerous it could be without a comprehensive supervision regime," said Li.
Li said supervision is becoming increasingly important as more companies need to engage in the overseas futures market with growing exposure in the international market.
(China Daily December 3, 2004)
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