Photo: VCG

Chinese investors taking long positions in a crude futures product sold by the Bank of China (BOC) have not only lost their principal investments but have now also found themselves owing millions to the bank.

The unusual incident occurred after the West Texas Intermediate (WTI) crude May futures contract plummeted to a record low of -$37.63 a barrel on Monday. As the story unfolds, it transpires the huge losses were caused by the BOC rolling over its May contract positions too late. It then had to accept the historically low price to sell soon-to-expire contracts amid strained liquidity, when other market players were shunning deliveries of physical oil shipments.

Unsurprisingly, investors are blaming the bank for failing to take necessary precautions to avoid risks. Some other Chinese banks that offer similar products, like the Industrial and Commercial Bank of China, chose to roll over their May contract positions much earlier due to recent oil price turbulence during the coronavirus pandemic.

The drama is a typical example of a lack of experience and risk awareness among Chinese investors and financial institutions. While relevant financial authorities have asked banks to double check their product risk and submit self-examination reports after the incident, it is the Chinese financial industry that needs to reflect on how to adapt amid the pandemic.

The global financial market is experiencing unprecedented change and multiple risks due to the coronavirus crisis. Panic over the potential impact of the pandemic has not only ended a 10-year bull market for US stocks, but is close to triggering wild fluctuations in financial products ranging from commodities to futures and derivatives.

Against such a backdrop, the Chinese financial sector is facing an urgent need to strengthen risk management and supervision. The BOC incident raises serious questions over Chinese financial institutions' ability to invest in high-risk derivatives and products, which appear immature and unprofessional compared to their Western peers. For instance, hedge fund managers like Pierre Andurand reportedly made huge gains in the same oil price plunge.

Qualified financial professionals with mature understanding of risk management are urgently needed in China's financial sector to avoid heavy losses in future trading, otherwise such colossal losses will continue in Chinese financial institutions and companies. 

More importantly, as China has already begun further opening up its financial market to the world, it will not be long before experienced foreign institutions and hedge funds enter the Chinese market. It is truly disturbing that whether Chinese financial institutions will be able to cope with increased market risks at that time is in question.

Regulatory authorities will, of course, try their best to strengthen risk checks for high-risk transactions by domestic institutions, but the key to solving the issue is ensuring financial institutions themselves can withstand market risks, both at home and abroad.