In a statement to the stock exchange dated January 4, Hong Kong-listed China Haisheng Juice Holdings Co said it is paying Wall Street bank Morgan Stanley $7 million to settle lawsuits in the UK and China over hedging contracts.
The out-of-court settlement effectively ends the dispute as the companies have agreed to end legal proceedings over yuan-dollar hedges they had been fighting in courts in the UK and China since last April.
A win for the Wall Street bank?
Haisheng will pay Morgan Stanley $7 million, far less than the $26 million the investment bank had been fighting for in London's High Court after the Chinese company ceased payments on the hedges.
The Chinese company in turn was counter-suing the US bank in China for allegedly mis-selling it the contracts, which according to sources were straightforward currency swap transactions between the US dollar and
Since September 2009, there have been fears that Chinese enterprises would unilaterally terminate and not pay up on losses on derivative contracts, classified by a Chinese government official as "intentionally complex and highly leveraged products that were fraudulently peddled by international investment banks with evil intentions."
"To some extent some international investment banks were the chief culprits and the root of ruin for the Chinese enterprises who encountered this financial derivatives Waterloo," Li Wei, vice chairman of the State-Owned Assets Supervision and Administration Commission, was quoted as saying.
Li singled out Goldman Sachs, Merrill Lynch, Morgan Stanley and Citigroup in the article published in the Study Times, an official Communist Party newspaper.
One such contract involves Chinese utility Shenzhen Nanshan Power and J. Aron, a Singapore unit of Goldman Sachs. Incidentally, the leading foreign investor in Haisheng is Goldman Sachs. Goldman's private equity arm holds 20% of Haisheng's Hong Kong-listed shares.
Shenzhen Nanshan is among 68 Chinese state-controlled companies, including China Eastern Air Holding Co and China National Aviation Holding Co, that lost money on derivative products sold by banks including Goldman Sachs, Morgan Stanley, Merrill Lynch and Citigroup.
The companies controlled by SASAC bought derivatives to hedge against rising commodity prices and fluctuating exchange and interest rates. These companies incurred paper losses of Yuan 11.4 billion ($1.67 billion) on the Yuan 125 billion worth of derivative contracts bought by the end of October 2008, SASAC's Li said.
The regulatory watchdog said in September it would support state-owned companies that take legal action over the heavy losses.
So while Morgan Stanley may have recovered $7 million, the settlement could encourage other Chinese companies to take legal action against foreign banks at home as a tactic to escape loss-making contracts.
Shenzhen Nanshan has said it won't rule out the possibility of legal action to resolve its dispute with Goldman Sachs, although negotiations with the Wall Street back are still ongoing. The utility has refused demands by J. Aron to pay $80 million for alleged defaults on oil hedging contracts.
**Ding Ding** Round two***
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