Thursday, January 7, 2010

Chinese Companies Refuse to Pay for Derivative Deals Gone Sour

The Financial Times is reporting that Chinese companies are putting up a determined fight and refusing to pay for derivative deals gone sours - deals which they claim, they were coerced into due to aggressive selling by foreign banks such as Morgan Stanley. One such company China Haisheng Juice Holdings, recently entered into an out-of-court settlement with Morgan Stanley. According to the Financial Times:
The two companies have agreed to end legal proceedings over renminbi-dollar hedges which they had been fighting in courts in the UK and China since last April. Under the settlement, Haisheng will pay Morgan Stanley $7m, far less than the $26m the investment bank had been fighting for in London’s High Court after the Chinese company ceased payments on the hedges.
Folks will recall that back home in the U.S., the smae story played out much differently: Tim Geithner was so 'shaking in his boots' scared of the big U.S. banks, that he did even attempt to negotiate over the AIG derivatives payments. He paid out the banks in full. But our banking cowboy amigos are not so slick in Chinatown. Quite the contrary. In China it is the foreign banks such as Morgan Stanley that are seriously afraid of the Chinese government. The Financial Times article points this out:
The scale of the losses in the wake of the financial crisis triggered a clampdown on derivatives by regulators in Beijing and criticism of the practices of foreign banks. A legal battle in China would have subjected Morgan Stanley to financial and political risks, lawyers said, making the settlement the most attractive option. Global banks are reluctant to fight cases in China, where judges are appointed by local communist leaders who often control large companies in their areas.
In other words Morgan Stanley chickened out over the threat of the Chinese government kicking them out of the China market. So how come our government does not wield a similarly heavy stick? Why do we keep offering these banks only carrots?
Post the  Haisheng case where Morgan Stanley was forced to settle for a pittance, the door has now been flung wide open for every other Chinese company that was conned into derivative deals to dissent and refuse payments.
But wait the story does not end gets even more juicy.
The leading foreign investor in Haisheng is Goldman Sachs, Morgan Stanley’s competitor. Goldman’s private equity arm holds 20 per cent of Haisheng’s Hong Kong-listed shares. Goldman Sachs is itself involved in a dispute over derivatives with a Chinese company. Shenzhen Nanshan Power last week refused demands by J. Aron, a trading subsidiary of Goldman Sachs, to pay $80m for alleged default on oil-hedging contracts.
Finally someone has the guts to stand up to the mightly Goldman Sachs. Bravo.

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