China’s biggest bank halts investment in products linked to oil

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China’s biggest bank by assets has suspended new retail investments in products linked to oil and other commodities, as pressure mounts on banks to protect small investors following heavy losses linked to recent swings in US crude prices.

Industrial and Commercial Bank of China (ICBC) said on Monday that it was halting all new investments in commodity-linked products due to the recent price volatility, warning investors that they risked big losses from products that have gained in popularity across Asia.

The move from ICBC suggests that the Chinese financial industry is keen to damp demand for products that many punters had assumed would be a sure-fire hit, betting the oil price would recover from lows marked earlier this year.

A “crude oil treasure” product sold by Bank of China, ICBC’s rival, is reckoned to have left investors with big losses when US oil prices turned negative last week. That product, which tracked short-term oil prices, has since been suspended. Chinese news service Caixin has reported that investors lost a total of $1.4bn on the instrument.

BoC has faced outbursts of anger and criticism online, after leaving its retail customers invested in the expiring West Texas Intermediate contract for May, which plunged almost by $50 a barrel in a single day to settle in negative territory for the first time ever.

Many investors will not only have lost all their money when the May WTI contract fell to zero, but also accrued liabilities as it plummeted into negative territory.

The record number of “trading at settlement” contracts that were executed on the day of last Monday’s crash suggests that costly damage was inflicted on at least one large investment product.

These contracts are often used by managers of oil-linked financial products like ETFs, when they must perform their regular so-called “roll” from one month to the next before futures contracts expire. The TAS contracts can help to smooth out bumps during the monthly roll, but the downside is that it locks investors into the settlement price on the day.

More than 140,000 of these contracts for WTI oil traded on April 20, compared with a maximum of 30,000 traded on any given day throughout 2019. BoC has confirmed it settled an unknown number of its contracts at the -$37.63 closing rate, but has not responded to a request for comment on the scale of customers’ losses.

Traders have criticised the bank for waiting until very late in a contract’s life — when trading tends to be thinner and more volatile — to execute the roll. Generally, market participants tend to jump out of the expiring contract earlier.

By Monday, comments on Chinese social media labelled “crude oil treasure million-dollar loser” had attracted more than 140m views. “Bank of China should be investigated and they should figure out how the money was lost,” wrote one social media user on Weibo, a Twitter-like platform.

The tag “Don’t let Bank of China run away” was also widely shared on Weibo in recent days, with many arguing that the bank should make up the losses to investors.

The unusual public rage directed at a state-backed bank appears to have pushed BoC towards making up at least part of the losses. In statements early last week, the bank indicated that investors would be forced to cover full losses — a stance it has appeared to soften since.

“In some people’s eyes, it seems like the bank is willing to bear some losses now,” said Chen Shujin, an analyst at Jefferies.

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