Dec. 4 – A senior Chinese economic official has put the blame on top international banks for the RMB11.4 billion (US$1.67 billion) total losses incurred in October last year by state-owned enterprises on derivatives investments.

The vice chairman of the State-Owned Assets Supervision and Administration Commission, Li Wei, wrote his criticism in the newest issue of Study Times, a newspaper published by the Party School of the Central Committee of the Communist Party. He heads the commission tasked with overseeing the management of more than 100 of the largest state-owned enterprises in the country.

He cited that “fraudulent practices” by international investment banks were to blame for the huge losses. He criticized Citigroup, Merrill Lynch and Morgan Stanley for their “extremely complicated” derivatives products that were difficult to understand.

A total of 68 state-owned enterprises incurred losses in their dealings with foreign investment firms. The Wall Street Journal reports that from June and August last year when oil prices were at US$140 a barrel, China Eastern Air Holding, China National Aviation Holding and Cosco Group signed huge contracts with foreign investment banks – including Goldman Sachs, Merrill Lynch and Morgan Stanley — to buy call options and sell put options.

Oil prices dropped afterwards and the three companies incurred net book losses of RMB19.9 billion by the end of 2008 with a combined contract market value of RMB9.2 billion.

“Some fraudulent practices by some international investment banks resulted in major losses,” Li was quoted by The Wall Street Journal as saying. Chinese companies should bear some responsibility, but the losses “are also closely linked to hostile sales of certain fraudulent, complicatedly designed high-leveraged products by international investment banks.”

The commission has expressed support for state-owned companies filing suit against foreign banks for their energy-linked derivatives losses.