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State-owned enterprises (SOEs) should set up a risk management commission to prevent losses and enhance their competitiveness, the State-owned Assets Supervision and Administration Commission (SASAC) urged in a guideline issued yesterday.

The guideline shed light on the overall principles, basic process and evaluation of risk management.

The guideline aims to avoid a recurrence of the China Aviation Oil Singapore Co (CAO) case, which forced the company to request bankruptcy protection in November last year after losing US$550 million in oil derivatives trading in 2004.

The CAO case is the largest scandal involving a Chinese State-owned company listed overseas.

Li Rongrong, SASAC minister, said at a work conference that the incident at CAO could have been avoided if there was a sound internal auditing and risk management system.

He pointed out that sound corporate governance and an effective restraint scheme constitute the two fundamentals of a solid risk-management system.

The collapse of CAO sparked widespread concern over the credibility of Chinese companies listed on the Singapore market, with mainland companies' shares experiencing massive losses there after the scandal came to light.

Since 2004, and especially after the CAO case, SASAC has been paying increased attention to risk management work in SOEs.

Li Rongrong invited Raymond Woo, a senior financial consultant who chairs business operations at Ernst & Young China, to give a lecture on risk management to SOE managers at the annual work conference.

Meanwhile, SASAC sent seven SOE board members to Hong Kong to receive training on risk management in 2005. And the ministry has organized eight seminars on the subject over the past two years.

However, an official with SASAC admitted that most SOEs were still in the early stages of establishing a risk management system, with the few that have floated their shares overseas the exception.

According to a source who participated in the guideline drafting, SASAC at one stage planned to ask all SOEs to designate a chief risk officer, but gave up the idea due to the big differences in SOEs' levels of internal management.

(China Daily June 21, 2006)