China Eastern Airlines Corporation Ltd. (SHSE: 600115), a state-owned air carrier in the country, has gained support from the regulator behind the state-owned companies to terminate the financial derivative contracts with some foreign investment banks.This is not a tiny company. China Eastern is a huge airline with a massive fleet, owned by the government.
Thursday, September 10, 2009
China Eastern Airlines defaults on fuel hedging contracts
And so it begins.
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6 comments:
The wording in that article is odd, seemingly avoiding stating outright that the airline wants to terminate a contract on which it owes huge amounts of money because it bet the wrong way on fuel hedging. See below for more clarity.
The Chinese seem in this case to be rather selective about enforcing contracts, which (perhaps again) highlights the risks of doing business in that country. I'd hoped for better from them. Sigh. What they'll end up with is an inability for their companies to hedge when they really need to because nobody will trust them.
(Not that some pols in this country don't want to do the same to contract enforcement here...)
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From the Wall Street Journal:
HONG KONG -- Foreign banks that entered oil-derivative contracts with some Chinese airlines and shippers could find they have little recourse if the companies make good on threats to default on obligations.
This week, China's State-Owned Assets Supervision and Administration Commission offered encouragement to some Chinese companies to challenge losses stemming from derivatives used to protect against sudden spikes in the price of fuel.
It will be interesting if the WTO gets involved. Imagine China forced to go to all cash FOB for their trading.
I've wondered what will happen to all the billions upon billions of dollars of foreign investment if the crap really hits the fan in China. I don't think that people have been discounting the fact that there isn't law apart from what the Communist party says.
Imagine China forced to go to all cash FOB for their trading.
People said that about California and its IOU's, too, but as Lou here can tell you, some companies still had to grit their teeth and accept it because they couldn't say no to the potential business.
Rob, that's just it. (Yeah, I know, we can't talk considering the Feds wanting to force real estate contract changes. But we still honor things like hedge contracts.)
Why would anyone enter into a contract with China when they can change the rules? Things are seriously amiss in China and we don't know the facts because they don't provide accurate reporting. The ChiCom statisticians say the Chinese economy continues to grow by leaps and bounds. I don't believe anything they say. I think their economy is collapsing.
I still do business in China, and nobody I know who does would be the LEAST bit surprised by this.
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