Friday December 4, 2009 MYT 2:01:00 PM

Foreign banks rapped for selling derivatives with "fraudulent characteristics"

BEIJING: A senior Chinese official criticized foreign banks for selling derivatives with "fraudulent characteristics" that led to heavy losses for state-owned airlines and other companies.

"Some international investment banks are the biggest villains," said Li Wei, deputy chairman of the agency that oversees China's biggest state companies, in a newspaper published by the school of the Communist Party's Central Committee.

The commentary in this week's edition of the Study Times was the Chinese government's most pointed public criticism yet of foreign financial institutions.

Li's agency said in September it would support companies that want to challenge the contracts in court.

Li made no specific accusations against individual banks.

But he noted that airlines and shipping companies suffered huge losses on fuel contracts bought from Goldman Sachs Group, Merrill Lynch - now a unit of Bank of America Corp. - and Morgan Stanley, while banks bought derivatives from Merrill Lynch, Morgan Stanley and Citigroup.

He said Chinese companies were to blame for most of their losses but complained that derivatives tied to oil prices and other commodities or investments were too complex and made potential risks too hard to identify.

"Of course, first of all we need to find problems in the companies themselves," Li wrote in the front-page commentary.

"But it also is largely related to international investment banks maliciously peddling high-leverage, complex products with fraudulent characteristics."

Some 68 major companies, half of them directly controlled by the Cabinet, invested in derivatives and recorded book losses totaling 11.4 billion yuan ($1.7 billion) by the end of October 2008, according to Li.

Spokespeople in China for Goldman and Citigroup declined to comment.

Spokespeople for Morgan Stanley and Merrill Lynch did not immediately respond to phone messages and e-mails.

Li's agency, the State-Owned Assets Supervision and Administration Commission, oversees 136 major banks, insurers, phone carriers and other companies including China Telecom Ltd., Bank of China Ltd. and China National Petroleum Corp.

Li said Chinese companies still should use derivatives but should comply with regulations and shouldn't "give up eating for fear of choking". - AP