Credibility vital for mainland firms
By Xie Ye (China Daily)
Updated: 2004-12-13 08:48

The collapse of Singapore-based China Aviation Oil (CAO), which lost US$550 million in derivatives trading, is affecting business of Chinese trading companies in the Singapore oil market and has caused huge losses for them.

Experts urged the companies to improve risk management and corporate governance to avoid a possible creditability crisis.

Banks in Singapore have started to review the credit of mainland oil trading companies, especially privately-owned companies, after the CAO scandal was exposed at the end of last month, traders said.

Banks have tightened credit limits and raised the minimum deposits of mainland firms for importing and exporting business in the past two weeks, traders said.

Trading partners in the Singapore oil market, the Asian oil trading hub, have also required mainland companies to obtain letters of credit from banks to guarantee payments.

Additional risk-control efforts came after CAO announced Singapore's largest derivatives trading loss since 1995. The company, China's dominant jet fuel importer, racked up huge losses in speculative trading which has been denounced by the Chinese authorities as "violating regulations."

"The incident has severely tarnished the reputation of mainland companies in the Singapore market," said one Singapore-based oil broker in an interview with China Daily.

"The market has become alert to the creditability of Chinese companies, especially private and small companies. Banks have begun to review their creditability," said a broker who declined to be identified.

Compared with large State-owned companies, small private companies tend to lack corporate governance and strong government support.

Traders said the additional requirements have increased the costs of oil trading business of domestic companies as they have to pay commissions to banks for issuing letters of credit.

Meanwhile, the increase of deposits strains the cash flow which, in turn, scales down the trading volume.

The general manager of a private oil trading company in Guangzhou said the banks have limited the credit line of the company for importing fuel oil from the Singapore market.

The company's trading has been restrained, said the manager by telephone.

"The fallout of CAO's financial crisis is immense," said the general manager. "The sentiment of the market now becomes jittery."

Such skepticism over mainland companies will not pass over until at least February when the celebration of the Chinese Lunar New Year festival may help ease the concern, said the manager who preferred not to be identified.

Chinese oil traders are by no means the only ones suffering from the creditability crisis.

From November 24, even before the CAO debacle was exposed, and December 7, Singapore-listed mainland companies have lost 1 billion Singapore dollars (US$609.7 million) in market value, according to the Economic Observer, the influential mainland newspaper.

Experts said the incident should serve as reminder to domestic companies to improve risk management and corporate governance.

"Risk management seems to be boring and may be easily overlooked," said the Singapore-based oil broker.

"But once it goes wrong, disaster occurs."

Li Lei, founder of Beijing Derain Inc, a commodity research company, said the incident should be a new chance for Chinese risk-averse regulators to develop the futures market while reinforcing the supervision system.

"It proves again how dangerous it can be without a comprehensive supervision regime," said Li.

On Friday, Singapore's High Court threw a lifeline to CAO by allowing the company an extra six weeks to seek protection from creditors.

The company is allowed to seek rescue from its parent China Aviation Oil Holding Company and Singapore's state-run Temasek Holdings Pte until June.

CAO has asked its parent and Temasek to invest US$50 million each.

China Aviation Holding Company said the financial crisis of the Singapore company will not affect domestic jet fuel.

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