Goldman Sachs has threatened to sue a Chinese power company for defaulting on two oil hedging contracts, escalating a long-running dispute between China and Wall Street banks over derivatives losses.
Shenzhen Nanshan Power, a state-owned thermal power generator, said this week that J Aron & Company, the commodities business of Goldman Sachs, had threatened to sue it for $80 million (£50 million) compensation for terminating the contracts in October 2008.
“We will not accept the demand by J Aron for all the losses and related interests,” Shenzhen said in a statement to its local stock exchange, adding that it was negotiating with J Aron to resolve the dispute.
However, the company cautioned that J Aron had warned that if Shenzhen did not pay up, J Aron reserved the right to sue without further warning.
“The possibility of using a lawsuit cannot be ruled out when talks fail,” Shenzhen told the exchange.
In March 2008, Shenzhen executives took out contracts with J Aron that bet that the oil price would remain above $62 a barrel between March and December.
Oil prices had soared in early 2008, hitting $110 a barrel in March and reaching a record high of $147.27 in July.
But by October the oil price was below $70 and in December it scraped $33 a barrel.
Facing the prospect of large losses on the contracts, in October 2008 the Chinese securities regulator forced Shenzhen to cancel its agreement with J Aron, which the regulator said the power company’s executives had not been authorised to enter into.
Thirty-one companies are permitted by the Chinese regulator to trade derivatives on overseas markets.
But, by last October, 68 Chinese companies had run up an estimated $1.6 billion in losses on oil hedging contracts with foreign banks, including Goldman Sachs, Morgan Stanley and Merrill Lynch.
Shenzhen said in December 2008 that it would not meet J Aron’s demands for payment under the cancelled contracts.
China’s State-Owned Assets Supervision and Administration Commission (SASAC) has supported Shenzhen’s hardline stance.
Le Wei, vice-chairman of the SASAC, said this month that foreign investment banks had “maliciously” sold derivatives contracts that were “intentionally complex and highly leveraged” to state-owned companies.
The banks “fraudulently peddled” the contracts with “evil intentions”, the SASAC claimed.
No foreign bank has yet brought a legal action to pursue payments due under the contracts. Goldman Sachs declined to comment.
From The Times
Christine Seib in New York
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