China Asks Banks to Report Derivatives Risk as Markets Reel

(Bloomberg) -- China asked its biggest financial firms and other state-owned enterprises to report the extent of their exposure to derivatives contracts following wild swings in nickel and other commodities that embroiled one of the country’s largest banks.

At least two Chinese banks held urgent internal meetings about their clients’ exposure on Tuesday, according to people familiar with the matter who asked not to be identified discussing private information. The State-owned Assets Supervision and Administration Commission asked major state entities to provide data on their energy and commodity-linked derivatives along with any potential losses they face, the people said.

SASAC and the China Banking and Insurance Regulatory Commission didn’t immediately respond to requests for comment. 

CCBI Global Markets, a unit of China Construction Bank Corp., was given additional time by the London Metal Exchange to pay hundreds of millions of dollars of margin calls linked to nickel positions that it missed Monday, Bloomberg News reported earlier. The non-payment is more likely due to a failure by one of its metals-industry clients to make payments to CCBI, a broker on the LME trading floor. The brokerage has now paid the outstanding margin calls.

Nickel, used in stainless steel and electric-vehicle batteries, surged as much as 250% in two days to trade briefly above $100,000 a ton early Tuesday, prompting the LME to suspend trading of the metal. The frenzied move -- the largest-ever on the LME -- came as investors and industrial users who had sold the metal scrambled to buy the contracts back after prices initially rallied on concerns about supplies from Russia, while brokers rushed to collect margin payments to cover their deeply unprofitable positions. 

Chinese entrepreneur Xiang Guangda -- known as “Big Shot” -- has for months held a large short position on the LME through his company, Tsingshan Holding Group Co., the world’s largest nickel and stainless steel producer, people familiar had said. In recent days, Tsingshan has been under growing pressure from its brokers to meet margin calls on that position -- a market dynamic which has helped to drive prices ever higher.

It’s not the first time that Chinese banks have been burned by wild price swings of commodities. Bank of China Ltd. in 2020 shouldered part of the $1 billion loss suffered by thousands of retail investors after a product linked to the price of oil collapsed. The turmoil at the time even reached the highest level of government, with Vice Premier Liu He issuing a statement calling on banks to strengthen controls over such products and protect investors.

Since then China’s largest banks, including Bank of China, Industrial & Commercial Bank of China Ltd. and Bank of Communications Co., have suspended the opening of new positions in products linked to commodities such as oil, natural gas and soybeans for individuals. They still offer derivatives services for corporate clients.

Guo Shuqing, China’s top banking regulator, in June warned retail investors to avoid financial derivatives, stepping up a bid to curb risks amid rising volatility in global commodities. Investors that speculate in currency, gold or other commodity futures are set to pay the same heavy price as those betting that property prices will never fall, he said.

©2022 Bloomberg L.P.

With assistance from Bloomberg