HONG KONG -- An executive's soured bets on the direction of the Australian dollar will result in nearly $2 billion of losses at Citic Pacific Ltd., a Hong Kong-listed conglomerate backed in part by Chinese state money.
Citic Pacific ENLARGE
Citic Pacific
Citic Pacific Chairman Larry Yung blamed the losses on unauthorized trades placed by the company's group finance director, Leslie Chang, who Mr. Yung said had been fired. He said the company also has fired Chi Yin Chau, group financial controller, for neglecting to provide proper oversight.
In a news conference, Mr. Yung said it was "regrettable that policies and procedures on risk management were not followed."
Messrs. Chang and Chau couldn't be reached for comment.
The hit to Citic Pacific's bottom line could reach 14.7 billion Hong Kong dollars ($1.89 billion), the company said. That is roughly a third more than the company earned in 2007. The size of the loss won't be known until Dec. 31, when Citic Pacific plans to mark to market its positions in currency-derivative contracts.
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Problems with risk controls aren't unknown in Asia. In 2004, oil trader China Aviation Oil (Singapore) Corp., whose shares traded on the Singapore stock exchange, racked up US$550 million of losses after it used derivatives to speculate on the price of oil. In 2005, a Chinese metals trader handling China's strategic commodity reserves incurred losses that ran to US$600 million when he engaged in short sales of copper on the London Metals Exchange. The trader essentially bet copper prices would fall, before those prices moved against him.
Some investors and analysts worry that more bad news could emerge from Asian corporations caught wrong-footed by the markets. "One of the problems of Asian corporate governance has been lax internal controls," said Jamie Allen, secretary-general of the Asian Corporate Governance Association.
Still, he said, Citic Pacific's revelation is a bit of a surprise, given that the company has a fairly well-regarded management team.
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Mr. Yung sought to assure investors that no fraud had been discovered. He also said the company intends to swallow all the losses this year, to prevent the bad bets from hampering earnings in 2009. Despite the assurances, analysts expect a decline in Citic Pacific's shares when trading resumes Tuesday in Hong Kong. When trading was suspended Monday pending the announcement, Citic shares were at their Friday close of HK$14.52. They are down 67% for the year.
Kenny Tang, an analyst at Tung Tai Securities Co. in Hong Kong, said, "This case shows the company's poor risk management, and it may take a long time for it to regain investors' confidence."
The bad bets arose in connection with an iron-ore mine that Citic Pacific owns in Western Australia, a hot spot of deal making for Chinese companies hungry to secure access to natural resources that can fuel China's industrial economy.
According to the company, Citic Pacific purchased equipment and supplies in Australian dollars and euros. To help fund that project, Mr. Chang entered derivative contracts that stood to profit as long as the U.S. dollar weakened against the Australian dollar. It seemed a smart bet until the financial crisis pushed down commodities prices this summer and sent foreign-exchange rates zigzagging.
Citic Pacific, with businesses ranging from property, infrastructure, aviation, power generation and production of specialty steel, said it became aware of the currency exposure Sept. 7 and began terminating some contracts. It apparently ran into more trouble when the Australian dollar weakened this month.
One of the biggest surprises of the global financial turmoil has been the strength of the U.S. dollar, which is benefiting as investors around the world shed risky assets and unwind investments made with borrowed cash. The Australian dollar has weakened about 29% against the U.S. currency since July, when falling commodities prices knocked it from its high for the year of 97.85 Australian cents per U.S. dollar. Late Monday in New York, it was 70.38 Australian cents per U.S. dollar.
Mr. Yung told reporters that Mr. Chang failed to obtain approval for certain bets on the Australian dollar as well as on the euro and Chinese yuan.
Citic Pacific's state-owned parent, Citic Group, has agreed to step in with a standing loan of $1.5 billion. Citic Group holds 29% of Citic Pacific