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December 29, 2009 Author: Luo Jun, Jiang Jianguo, Zhao Yidi, Philip Lagerkranser, Joost Akkermans Taken from: Bloomberg - Shenzhen Nanshan Refuses Goldman Demand for Payment Dec. 29 (Bloomberg) -- Shenzhen Nanshan Power Co., a utility based in the southern Chinese city, said it refused demands by a Goldman Sachs Group Inc. unit to pay $80 million for alleged default on oil-hedging contracts. Shenzhen Nanshan and Goldman Sachs disagreed on the cause for terminating the contracts in December 2008 and it remains to be determined which party should incur the trading losses, the Chinese firm said in a stock exchange statement today. Shenzhen Nanshan said that while negotiations with Goldman Sachs’s Singapore unit are continuing, it won’t rule out the possibility of legal action. Shenzhen Nanshan is among 68 Chinese state-controlled companies including China Eastern Air Holding Co. and China National Aviation Holding Co. that lost money on derivative products sold by banks including Goldman Sachs, Morgan Stanley, Merrill Lynch & Co. and Citigroup Inc., according to the State- owned Assets Supervision and Administration Commission. “The global financial market is more complicated, deeper and riskier than the domestic market, and players like Goldman certainly have the expertise that their Chinese counterparts lack,” said Hubert Tse, a Shanghai-based managing director at Yuan Tai PRC Attorneys. “Chinese companies need to do their homework before getting involved.” Goldman Sachs spokesman Edward Naylor declined to comment. ‘Fraudulent Practices’ “Fraudulent practices” by some foreign banks were partly to blame for more than 11.4 billion yuan ($1.7 billion) of derivative losses at those companies last year, Li Wei, vice chairman of the agency, wrote in an article this month, without saying which banks may have been at fault. Shenzhen Nanshan went into a dispute with Goldman Sachs a year ago after it refused to pay for losses on contracts signed in March 2008 based on oil prices ranging from $62 to $66.50 a barrel, the power producer said earlier. Chinese regulators have said the contracts bought from Goldman Sachs didn’t pass “proper decision-making channels, failed disclosure rules and violated state laws.” In one contract, Shenzhen Nanshan would gain as much as $300,000 a month if oil prices were to rise above $63.50 a barrel between March 3 and Dec. 31, 2008, the Chinese company said in October 2008. The company would incur a loss if oil fell below $62. Crude oil fell as low as $32.40 a barrel in December 2008. Profit at Shenzhen Nanshan slumped 94 percent last year. Right to Default “Nanshan should never have touched trades like this,” said Song Yixin, a partner at Shanghai Newhope Law Firm. “These trades aren’t for ordinary people or companies, they are supposed to be a product used only by large banks.” China has approved 31 companies to trade derivatives overseas, with 16 of them owned by the central government. The state assets regulator sent letters to foreign banks stating Chinese counterparties will reserve the right to default on commodity hedging contracts, Caijing Magazine reported Aug. 29. Shares of Shenzhen Nanshan have gained 132 percent this year, beating the 75 percent gain in the benchmark Shanghai Composite Index. The stock fell 1 percent to 7.32 yuan as of 3:15 p.m. local time. |