Saturday, December 20, 2008

Yuan Watch : Ripping your most honorable face off

DECEMBER 19, 2008

HONG KONG -- A face-off with a small Chinese power company over its losses on oil-related derivatives is turning into a big headache for Goldman Sachs Group Inc., a counterparty for a number of such trades in China.

Arguing that the transactions with the Wall Street firm were "unauthorized," Shenzhen Nanshan Power Station Co. is refusing to pay Goldman for the losses it has incurred, which people familiar with the situation said amount to tens of millions of dollars.

The sum at stake is small compared with losses at some other companies that hedged their oil exposure, but the downside could be significant for Goldman. Its Singapore commodities unit, J. Aron & Co., has acted as counterparty for several Chinese companies that are claiming bigger losses from oil hedging, including Air China Ltd. and China Eastern Airlines Corp. Although these companies aren't disputing their recent losses, offering Shenzhen Nanshan a break could set a precedent for Goldman if ever confronted in the future by other corporate clients.

"We are confident that these contracts are valid, and that we will reach a resolution with the company," said a spokesman for Goldman.

The extent of losses from oil derivatives among Chinese companies has attracted scrutiny from the country's regulators and the local media. Some Chinese publications have depicted Western investment banks as predators that hoodwinked unsuspecting Chinese executives. "Is Goldman Sachs running a derivatives casino?" read one headline from an online publication,

In its Dec. 13 statement, Shenzhen Nanshan accused J. Aron of not properly exercising its right to request that the company enter into one of the loss-making trades, and therefore a letter confirming the trade "no longer has any binding force on the company."

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