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Citic Pacific hit by wrong-way currency bets

Citic Pacific hit by wrong-way currency bets

Citic Pacific Ltd., a leading symbol of China Inc., has become one of the country's biggest casualties of the financial crisis after a risky currency bet soured and the market turmoil made it even worse.
Citic Pacific, the Hong Kong arm of a high-profile Chinese government company, stunned investors this week when it revealed wrong-way currency hedges could cost the company more than HK$15.5 billion (about US$2 billion).
The potential losses, about one-third more than the company's entire earnings in 2007, sent Citic's shares plunging, wiping out two-thirds of its market value in four days. It closed at HK$5 (US$0.64) Friday.
The battering of Citic Pacific has shaken confidence in a company that has long represented China's capitalist ambitions, a symbol of the pragmatic savvy behind the country's economic rise.
A vast conglomerate whose dealings run from airlines to mining and Wal-Mart stores, Citic Pacific is the reddest of the red chips _ state-linked companies that rose to prominence in Hong Kong over the past 20 years in part because of their connections to Beijing.
"Citic Pacific is the epitome of red capitalism," said Francis Lun, general manager of Fulbright Securities Ltd. in Hong Kong. "It has been seen as the flagship company for the Chinese government for years."
Citic Pacific's chairman, 66-year-old tycoon Larry Yung, reportedly rushed to Beijing this week to seek help from the company's major shareholder and patron, the Citic Group, in securing US$1.5 billion in emergency financing.
China's government is highly unlikely to let Citic Pacific fail, said political analyst James Sung of the City University of Hong Kong.
"It's very important to the central government," Sung said. "It would be a humiliation if the company went under. Everyone knows that behind the company are the central leaders, and they won't let that happen."
Yung is the son of Rong Yiren, a Shanghai textile and flour magnate whose wealth was seized by the communist government in the 1950s. The family suffered under radical Maoist policies in the 1960s _ including a stint for Yung doing farm labor in the countryside _ but its fortunes were revived when China embarked on economic reforms.
In the late 1970s, Rong set up China International Trust and Investment Corporation (Citic) to act as an overseas investment vehicle for Beijing. Rong was appointed to the ceremonial government post of state vice president.
His son, Yung, headed to Hong Kong, setting up the company that would become Citic Pacific with US$30 million in government funds. While his father practiced a low-key, self-effacing style, Yung blended in with Hong Kong's rich, collecting sports cars and art and serving on the board of the elite Hong Kong Jockey Club.
In recent years, Yung has often appeared on lists of China's richest business executives; Forbes' Chinese edition ranked him at No. 9 in 2007, with a personal fortune estimated at US$3.6 billion.
Today, the company is deeply intertwined with Hong Kong, owning stakes in property, toll tunnels under Hong Kong harbor and the territory's main airline, Cathay Pacific. In 2005, Citic and American retail giant Wal-Mart Stores Inc. announced a joint venture to open hundreds of stores on the mainland.
As China's hunger for natural resources has grown, so has the company's dealings in mining and energy.
Citic's current woes stem from its stake in an Australian iron-ore mining business.
For the project, the company needed to buy supplies and equipment in Australian dollars. Seeking to protect against rises in the Australian dollar and other currencies, the company apparently decided to hedge.
While businesses around the world hedge against currency fluctuations, Citic's transactions were far riskier than most, involving a leveraged derivative product known as accumulators.
The positions commit the company to buy foreign currencies above market value in ever-greater quantities if the currencies fall.
Citic says it discovered the loss on Sept. 7, when the Australian dollar had fallen to US$0.81, down from US$0.98 in mid-July. Then, in the recent market meltdown, the Australian dollar plunged, settling at US$0.61 on Friday.
So far, the company has realized a loss of nearly HK$808 million (US$104 million). Depending on exchange rates, the remaining contracts could cost another HK$14.7 billion (almost US$1.9 billion) when the company unwinds them this year.
"This wasn't a hedge, this was an outright bet," said David Webb, a well-known corporate governance activist in Hong Kong.
The company was quick to scapegoat two senior executives. Ousted were finance director Leslie Chang for allegedly making the transaction without prior approval, and controller Chi Yin Chau for failing to provide proper oversight.
Yung's 36-year-old daughter, Frances, who company officials have said reported to Chang, is also among those being blamed. She reportedly was demoted and had her salary cut.
The anticipated loss, equal to about 25 percent of the company's book value as of June 30, has outraged investors, generating complaints to Hong Kong's Securities and Futures Commission.
As activists called on company leaders to resign, Hong Kong's securities regulators and stock exchange opened investigations. Ratings agencies piled on with credit downgrades.
Webb and others have noted that the company continued to issue statements after Sept 7 _ when it says the loss was discovered _ stating it was unaware of any material adverse change to its finances or trading positions since the end of last year.
The company did not respond to repeated messages and e-mails seeking comment.
Citic is not the only Chinese company hit by the financial crisis. Earlier this month, the country's No 2. insurer, Ping An, said it would book a US$2.3 billion loss on its stake in troubled European bank Fortis NV. Two major railroad companies announced millions of dollars in losses from bad currency plays on Thursday.