Regulator cites rising market risk The mainland securities regulator has ordered state-owned firms engaged in trading of commodities futures in overseas markets to limit their trades to hedging purposes amid rising risks in the turbulent global financial market. The China Securities Regulatory Commission said it reminded executives at 25 companies including China Aviation Oil, PetroChina and Jiangxi Copper in a recent meeting in Shanghai about the ban on speculative trades in the overseas commodity exchanges. 'State companies can only participate in hedge-related trading in the overseas markets,' said Wang Yang, an assistant to the CSRC chairman. 'If we stick to that principle, we can keep risks under control.' Analysts said top securities officials were still haunted by CAO's unauthorised bets on oil futures in Singapore in 2004 that cost the company US$550 million. 'It is the right time for an alarm call to those companies because of the volatile commodity prices,' said Liu Zhongyuan, the chief economist at Xiangcai Qinian Futures. 'Speculation on commodity prices would probably lead to substantial loss.' In 2001, the mainland allowed companies supplying the nation's food and resources to hedge overseas futures exchanges when they exported or imported their commodities. The mainland now relies on imported crude oil, beans and copper to help the country maintain domestic supplies. With a lack of oversight, a few companies have taken advantage of their rights to speculate on the overseas markets. CAO, which supplied about one-third of the mainland's jet fuel in 2004, breached the bounds of its authority, leading to Singapore's biggest derivative-trading loss since the notorious case in 1995 when Nick Leeson lost US$1.4 billion at Barings. Another scandal emerged in November 2005 when a government trader Liu Qibing made wrong-way bets on copper. As a result, China had to deliver to international markets as much as 200,000 tonnes of copper, equal to all the copper stored in the rest of the world's warehouses. Potential losses could amount to several billion dollars if the 25 mainland industrial giants violated the decision-making process to bet on the direction of global commodity prices, analysts said. The Ministry of Commerce is responsible for supervising overseas futures trading by mainland companies. However, due to the time difference in settlements and loose control on corporate actions, analysts said it was difficult for mainland regulators to fully weed out irregularities. 'The regulator hoped the companies to be self-disciplined and warned them not to cross the line,' said Huang Lei, an analyst at Yongan Futures Brokerage. 'All in all, there are loopholes in the rule and monitoring system.' The CSRC said in the statement that it was determined to continue the policy allowing mainland companies to efficiently control costs and generate profits. 'It is an important tool for the licensed companies to achieve their business goals and control costs,' the statement said. Recent volatile global commodity prices amid the financial meltdown prompted the CSRC to step up oversight on the futures market.