In China, Speculators Need Not Pay to Play

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Singaporean authorities slammed a prison door on Chen Juilin after trading blunders cost his company $550 million in 2004. Chen was the managing director of jet-fuel supplier China Aviation Oil (CAO)  when the disastrous derivatives trading took place at the company’s Singapore-listed subsidiary.



Chen’s penalty was steep: He was sentenced in 2006 to four years and six months in a Singapore prison.



But the price paid in recent years by other Chinese company managers who lost money on financial gambles has been far less – and usually zero.

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Since late last year, several major state-owned enterprises including investment firm Citic Pacific Ltd., China Eastern Airlines, Air China and shipping giant COSCO Holdings Co. have reported huge losses tied to failed investments in risky financial deals.



Citic Pacific dropped HK$ 15.5 billion on a currency bet that went bad, while China Eastern and Air China lost 6.2 billion yuan and 6.8 billion yuan respectively on fuel hedging contracts. COSCO registered a loss of 4 billion yuan after wrong-way bets with freight forwarding agreements.



Two senior executives at Citic Pacific have been removed for investment miscalculations. But officials at other companies lost huge sums with impunity.



Unlike the Singaporean authorities who put Chen in jail, Chinese officials have neither launched investigations nor raised questions about the losses acknowledged by Chinese companies.



Chen argued that higher-ups shared responsibility for CAO’s losses. In fact, he said, the deals were approved by the company’s board as well as the China Securities Regulatory Commission (CSRC) and Civil Aviation Administration.

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“How can I make a personal decision to sell state-owned shares? Even the parent company isn’t able to do that,” Chen said to Caijing 10 days after he was released from jail.



At the trial, prosecutors said Chen violated government regulations by ordering CAO traders to buy and sell oil derivatives. He also failed to disclose losses to investors in financial statements.



But Chen is not the only one to blame. In an interview with Caijing, Chen quoted Li Rongrong, chairman of the State Assets Supervision and Administration Commission (SASAC), as saying CAO’s parent CAO Group should be held responsible for the losses.



SASAC stripped Chen of his post and membership in the Communist Party in February 2007.



Several senior executives in addition to Chen were familiar with CAO’s derivatives trading and participated in the decision to speculate on financial products. Yet none were punished as severely as Chen

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In addition to the prison term, the Singapore court fined Chen S$ 335,000. He was convicted of insider trading, forging financial documents, failing to disclose trading losses and deceiving CAO’s adviser, Deutsche Bank.



Other CAO executives on trial were fined between S$ 150,000 and S$ 400,000. They included Jia Changbin, then-chairman of CAO, as well as former company directors Li Yongji and Gu Yanfei.



CAO started trading derivatives as early as 1999 without permission from China’s securities regulator. In 2002, the China Securities Regulatory Commission (CSRC) criticized the company and barred it from speculative activities.



But in May 2003, CSRC gave the company permission to restart the deal-making. By October 2004, CAO had written down US$ 100 million in losses.

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Trying a self-bailout, CAO Group launched a private share issue to select investors. To attract these investors, however, the company hid its losses.



CAO published a financial report in November 2004 that failed to disclose what by then amounted to a loss of US$ 381 million. Regulators eventually discovered the deception, and brought CAO and Chen to court.



Chen returned to China recently after an early prison release to find that his mother had died and his wife was struggling with mental illness.



Chen said he “wants to talk with related supervisors” about his personal disaster. So far, however, his inquiries have fallen on deaf ears.

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