MS/China derivatives: Morgan Stanley has solved a problem in China — but the outcome may spell gloom for rivals. The Wall Street bank has reached a settlement with a company to which it sold exchange-rate derivatives, receiving a fraction of what it claimed was owed. It would probably have struggled to squeeze out more. This reinforces the unhappy idea that foreign banks in such cases have the weaker hand.
Western banks who sold derivatives contracts to Chinese firms are worried that they won't be able to enforce them if push comes to shove. Haisheng, the juice maker with which Morgan Stanley had its spat, failed to post collateral after a bet on the yuan went wrong. It doesn't help that China's state industry regulator has repeatedly criticised foreign institutions for selling “intentionally complex” paper.
The worry isn’t just that Morgan Stanley got less than a third of the $26 million it wanted. It's that enforcing a contract that rested on UK law ended up putting the bank at the mercy of China's courts. When Morgan Stanley pressed for payment, the juice company sued the bank in a domestic court for alleged mis-selling. Morgan Stanley tried to have the UK court block Haisheng’s suit — but the London hearing decided the juice maker could pursue its claims in China.
For a bank with aspirations to do more business in the Middle Kingdom, that can't have been very appealing.
At worst, the bank might have won a mere pittance in the UK, yet still faced an assault on its reputation in China — and faced an uphill struggle collecting the money.
Stanley isn’t the only bank in a derivatives predicament. Goldman Sachs, which happens to own 20 per cent of Haisheng, is itself involved in a dispute with a Chinese company. Shenzhen Nanshan Power refused to pay $80 million to a Goldman subsidiary for alleged default on oil-hedging contracts.
Goldman’s unit has not ruled out turning to the courts, but the parent too has Chinese ambitions to consider. It is unlikely to be cheered by this latest twist.
