Global ambitions dealt a big blow Inquiry launched into China Aviation Oil collapse

Singapore authorities launched investigations yesterday into a share sale by a China government oil company.

China Aviation Oil Holding Co (CAO) is at the centre of the city-state's biggest financial scandal since the 1995 fall of Barings Bank.

Lawyers said the inquiries could trigger lawsuits against the Beijing-backed CAO for insider trading and non-disclosure and against Deutsche Bank, which managed the sale of shares of the CAO Singapore unit.

The investigations by the Monetary Authority of Singapore and the police came after Chen Juilin, chief executive of the CAO Singapore unit, said in court documents that CAO sold a 15 per cent stake in the Singapore unit on October 20 to cover oil derivatives trading losses of $550 million (Dh2.01 billion).

The allegation that state-owned CAO knew of the losses at its subsidiary when it sold the stake was made in Chen's affidavit filed at the Singapore High Court on Monday. A copy of the affidavit was obtained yesterday.

Chen, a 43-year-old native of rural China who was Singapore's fourth-best paid CEO last year, has since been suspended from the Singapore-listed firm and flew back to China on Wednesday. Stock market authorities are seeking his return.

Banking analysts said the collapse exposed a poorly regulated over-the-counter oil derivatives market where swelling returns from rocketing prices this year bred complacency, especially when investing in companies with tight government links such as CAO.

"Banks which lent their money knowing that the company engaged in speculative activities should have been aware of the risks," said Seah Hiang Hong, banking analyst at Kim Eng Research. "It was well known that their trading was speculative."

Legal experts said the government investigations could lead to lawsuits from investors.

"Investors would have to piggyback on the MAS action," said Hans Tjio, associate professor at the National University of Singapore's Law Faculty. "Most investors would have some sort of claim because they have suffered losses."

Tjio said Singapore's central bank would likely investigate the Beijing parent for insider trading and non-disclosure. Other lawyers said Deutsche Bank could also be a target.

Deutsche Bank spokesman Michael West said the sale was done according to normal market practice and that Germany's biggest bank would respond to questions from regulators.

Chen's affidavit said Beijing-based CAO received payment demands totalling more than $247.5 million from seven financial institutions, including Barclays Capital, Standard Bank and Sumitomo Mitsui Banking Corp. Goldman Sachs, whose commodities arm J. Aron & Co. was among the list of CAO creditors, said its total exposure was limited to $7 million.

In the document, Chen said the Singapore company made its first report of its derivative transactions to its Beijing parent on October 10, when oil prices were rising and losses were mounting.

The potential losses on that date amounted to $180 million and its outstanding margin calls additional capital needed to cover the losses equalled $80 million, the document showed.

Some analysts such as Seah at Kim Eng said the collapse exposes how state-linked firms have mesmerised some banks.

"Some had thought it is a state-controlled company and nothing will go wrong, and if something goes wrong, the state will come to the rescue. But if you bail out state companies, you are telling people that they are not allowed to fail," said Seah.

Liu Yang, managing director for China investment at Atlantis Investment Management, said the scandal was a strong warning to investors trading overseas-listed shares of Chinese companies.

"The key problem at many overseas Chinese-listed companies is that their management lacks experience and skills. Fund managers can't just rely on due diligence by investment banks. They need to have their own channels to do due diligence, especially on the companies' management." The court documents said CAO Singapore began trading in speculative oil options in the second half of 2003, taking small, profitable positions on two million barrels of oil.

It bet oil prices would fall, and was caught off-guard when prices surged instead in early 2004. By the end of the first quarter, loses would have totalled just $5.8 million if it closed out its positions in the market, the court documents show.

Instead, it hung on, gambling prices would eventually fall, and its losses swelled to $30 million by the second quarter.

Beijing (Reuters) At the China Aviation Oil Holding Co (CAO) headquarters in Beijing, there is little evidence of the company's involvement in Singapore's biggest trading scandal since Nick Leeson brought down Barings in 1995.

A young man in a Santa suit emerged from the Ocean Pacific hotel that shares part of the building - an 18-storey half cylinder of green glass and red tile and the Zen House restaurant was doing bustling business on the first floor.

A receptionist in the lobby seemed bewildered when asked how the company was doing. "Nothing's happened," she said.

That's not the feeling in Singapore, where the company's sole overseas listed subsidiary shocked financial markets on Tuesday by announcing losses of $550 million from bad bets on the price of oil.

China Aviation Oil (Singapore) Corp Ltd has applied for court protection from creditors, while Singapore has launched an investigation.

The scandal is a heavy blow to the ambitions of CAO, a Chinese state-owned enterprise under the direct supervision of the central government, and has heightened concerns among investors over the management of Chinese listed firms overseas.

"The key problem at many overseas Chinese listed companies is that their management lacks experience and skills," said Liu Yang, managing director for China investment at Atlantis Investment Management in Hong Kong.

CAO owns aviation oil supply infrastructure at over 100 airports throughout China. It supplies almost all of China's eight million tonnes of annual jet fuel imports and is the eighth-largest jet fuel provider in the world. More than 100 foreign and Chinese airlines rely on its supplies.

Profits in 2003 amounted to 360 million yuan (Dh159.6 million) on turnover of 21.6 billion yuan.