SASAC Bans Speculation Using Financial Derivatives by Central State-owned Enterprises

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China’s State-owned Assets Supervision and Administration Commission (SASAC) has issued new rules governing the financial activities of state-owned enterprises (SOE).

On 20 January SASAC released the “Notice Concerning Several Items in Relation to Pragmatically Strengthening Financial Derivative Operation Management” (关于切实加强金融衍生业务管理有关事项的通知) (Derivatives Notice) and the “Notice Concerning Several Items in Relation to Central Enterprises Strengthening Share Investment Management” (关于中央企业加强参股管理有关事项的通知) (Share Investment Notice).

The Derivatives Notice clarifies rules in relation to the financial derivatives operations of SOE’s, including:

  • Professional responsibilities of boards, management executives and functional departments – establishment of a healthy three-tier management system and strict operational control;
  • Strengthening of the hedging principle;
  • Implementation of category-based management;
  • Refinement of risk-control requirements;
  • Strictly controlling key operating segments;
  • Strengthening of supervision and inspection.

The Derivatives Notice stresses in particular the need to strengthen the “hedging principle” of financial derivatives operations, and the strict prohibition of “any form of speculative transaction.”

The Share Investment Notice seeks to “standardise central SOE participation in share investments,” requiring that central SOE’s strictly control the “main operation investment direction.”

The Notice prohibits “avoidance of main operation regulatory requirements, and use of methods such as share investment by central SOE’s to invest in prohibited businesses such as commercial real estate.”

A senior official from SASAC said that in recent years central SOE’s have used share investment and other methods to cooperate or engage in joint-ventures with various other types of enterprises, which has played a key role in expediting the efficiency of state-owned capital and the development of a mixed-ownership economy.

“During the process of implementation however, problems have arisen in the share-investment decisions of some enterprises, including lack of standardisation and improper control of state-owned equity, impacting the efficiency of state-owned capital allocation, and leading to losses for state-owned assets.”

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