April 29, 2020 / 6:00 AM / a month ago

Breakingviews - Wall Street awaits Chinese oil crash post-mortem

A Bank of China logo is seen at the SIBOS banking and financial conference in Toronto, Ontario, Canada October 19, 2017. Picture taken October 19, 2017. REUTERS/Chris Helgren

HONG KONG (Reuters Breakingviews) - Bank of China’s commodities scandal deserves attention from foreign bankers. The country’s fourth-largest lender fumbled a crude oil futures product, leading to big losses. Beijing has moved to ease foreign entry into the sector, so how the government conducts this post-mortem will be instructive.

Facing a crash in crude prices, BoC last week closed out its Yuan You Bao product at -$37.63 per barrel, resulting in an estimated $1.4 billion loss, per local magazine Caixin. Part of that will be absorbed by speculators, the rest probably by the bank itself; furious retail investors are unlikely to pay BoC money they owe. On Tuesday, regulators began shutting down similar businesses at other institutions.

Creative finance has let amateurs around the world trade commodity derivatives they shouldn’t. U.S. regulators have restricted growth at the biggest exchange-traded oil product; prices for June delivery are collapsing as holders pre-emptively roll contracts into future months.

In China, the issue is complicated by the unique history of retail wealth management products. Broadly defined, WMPs invest in everything from bonds to distressed debt to ham sales. In the past, many were created by third parties and marketed by state-owned banks to ordinary depositors. That practice generated easy fees for lenders without staining their balance sheets, and falsely convinced buyers the high returns offered were guaranteed.

Chief banking watchdog Guo Shuqing hated the practice. He forced bankers to bring wealth management assets onto their books and let sketchy WMPs collapse un-rescued. Yields fell, and assets contracted to around $4 trillion last year, a 16% decline from 2018.

Yet the industry remains a promising channel to tap rising individual wealth, which is why Credit Suisse and UBS are in the market. European money manager Amundi was approved in December to start a wealth management joint venture with BoC itself, in which Amundi will hold a majority stake.

How Beijing sorts out BoC will therefore show how far Guo’s cleanup has gone. Officials can force the bank to repay investors, or let them take a bath, fire bankers or some combination. Either way, foreign financiers will have a better idea of what they are getting into.

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Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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