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Thu, Dec 02, 2004 - Page 12 News List

China Aviation Oil lost millions in derivatives


Singapore financial markets were jolted yesterday after a Chinese jet-fuel supplier listed in the city-state said it had racked up US$550 million in losses on derivative trades and was seeking protection from its creditors.

China Aviation Oil (中國航油), whose shares have been suspended since Monday, said late Tuesday it was facing a "financial crisis," and had suspended chief executive Chen Jiulin (陳久霖) while accountants PricewaterhouseCoopers investigated what went wrong.

The unit's state-linked parent, China Aviation Oil Holding Co, has extended a US$100 million emergency loan to the troubled group. In addition, a team of special investigators has been dispatched from China to assess the damage, the parent company said yesterday.

The scandal could be the biggest case of losses from speculative trading to hit Singapore since Nick Leeson rung up US$1.2 billion in losses that led to the collapse of Britain's Barings Bank in 1995.

"For shareholders this is a corporate earthquake registering, say, 9.5 on the Richter scale," David Gerald, chief executive of the Securities Investors Association of Singapore, told NewsRadio 93.8 yesterday.

"This is another Barings," the head of the investors' lobby group said.

The Singapore government has worked tirelessly over the past three decades to promote the country as a well-regulated financial center. The Singapore stock exchange has also courted Chinese companies to get them to list their shares in the country.

China Aviation Oil's statement said: "The company has suffered significant losses from speculative oil derivative trading," estimating that they totaled US$550 million.

Derivatives are complex financial instruments that allow the holder to make a bet about the likely movement of an asset. They are used by companies to manage risk, but are also favored tools for speculative trading with potential for huge payoffs or losses.

The Singapore Exchange moved swiftly to limit the potential fallout from China Aviation Oil's woes, vowing that through the probe by PricewaterhouseCoopers -- which it ordered -- the exchange would "get to the bottom of the matter as soon as possible."

The exchange added, in a statement released late on Tuesday, that investors shouldn't regard China Aviation Oil's problems as being indicative of troubles at other firms.

Efforts are now under way to save China Aviation Oil. China Aviation Oil Holding has approached the Singapore state investment agency, for help China Aviation Oil said.

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