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December 25, 2009

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Hedging to be better managed

CHINA Eastern Airlines has set up a commission to manage its hedging business in a move to avoid losses that it suffered previously.

The commission, consisting of management officials from the carrier, will supervise and manage all types of hedging activities, the airline said in a guideline to the Shanghai Stock Exchange yesterday.

The guideline seeks to regulate its derivatives business and reduce risks of losses after the carrier suffered heavy losses from fuel-hedging contracts last year. It states that the airline won't conduct speculative trading and its strategy will be to hedge against oil price movements rather than engage in profit taking.

China Eastern, the country's third-biggest carrier by fleet, also formed a team that will work with the commission. The team, consisting of the company's board secretary, auditing, law, financial and purchasing departments, will analyze the markets and propose investments plans.

Shanghai-based China Eastern lost nearly 14 billion yuan (US$2.05 billion) last year, with paper losses from fuel-hedging contracts totaling 6.2 billion yuan as it hedged 36 percent of jet-fuel needs in anticipation of rising prices. However, the prices fell from a record of US$150 a barrel to as low as US$35 on the global economic slump.

Sixty eight state-owned enterprises directly administrated by the central government suffered paper losses of 11.4 billion yuan by the end of October 2008 from their derivatives investments, said Li Wei, vice director of the State-Owned Assets Supervision and Administration Commission, in an earlier report.

Separately, China Eastern yesterday announced that it has issued 1.35 billion yuan-denominated shares to 10 investors at 4.75 yuan each to raise 6.4 billion yuan.

The proceeds will trim its debt-to-asset ratio to 94.7 percent and the carrier is expected to stop special trading limits, which halves the daily cap to 5 percent in either direction, in the stock market from next year.


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