HONG KONG — A Hong Kong conglomerate controlled by China's biggest state-owned investment company said Monday that it had realized losses of $104 million on ill-timed currency transactions and would lose an additional $1.9 billion if it were to mark the transactions to market now.
Citic Pacific, which is based and traded in Hong Kong, is investing more than $600 million a year in Australian dollars to develop an enormous mine in western Australia to supply iron ore for its steel mills in mainland China.
The company said Monday that it had incurred its heavy losses mainly through bets on the value of the Australian dollar in a botched attempt to hedge the currency risks associated with its large mining investment.
Citic Pacific said it had purchased derivatives contracts based mainly on the value of the Australian dollar relative to the U.S. dollar. The company also bought contracts based on the value of the euro and the yuan relative to the U.S. dollar.
These contracts had clear limits on how much Citic Pacific could gain from each transaction, but no limits on how much Citic Pacific could lose, the company said.
Other Chinese companies have also expanded in Australia, particularly in the mining sector, and have limited experience in managing the currency risks associated with their new international ventures. This raises the possibility that Citic Pacific may not be the only company with losses, said Dariusz Kowalczyk, the chief investment strategist at CFC Seymour, a Hong Kong securities firm.
"The question is whether it is an isolated case," Kowalczyk said. "I would be surprised if it is an isolated case because the same banks were probably selling the same products to other Chinese companies."
Many banks devise such contracts for corporate clients. Citic Pacific did not identify who had sold it the currency contracts.
The Citic Group, a giant Beijing-based state investment company that holds 29 percent of the shares in Citic Pacific, said it had made a $1.5 billion standby loan available to Citic Pacific.
Chinese regulators have strictly limited the participation of mainland companies in derivatives markets and have not allowed the creation of a derivatives market in China. But the foreign subsidiaries of mainland companies, including in Hong Kong, are often much less regulated.
Leslie Chang, the finance director of Citic Pacific, and Chau Chi Yin, the financial controller, resigned on Monday from the company, which did not accuse them of any misconduct. Neither could be reached for comment on Monday night.
The Hong Kong stock market suspended trading in Citic Pacific's stock on Monday morning at the company's request, before the announcement of the losses. Trading in the shares is scheduled to resume on Tuesday morning.
The exact loss for Citic Pacific is hard to calculate because the company still needs Australian dollars for its mining investments, and so does not plan to unwind entirely its currency transactions.
But because the transactions were done partly with borrowed money, they do not qualify as conventional hedge agreements. So accounting rules require that they be marked to market at the end of this year, Citic Pacific said.
Rapid industrialization and an acute shortage of natural resources at home have turned China into a voracious acquirer of overseas mines. Australia has emerged as a favorite destination for Chinese investors because of its abundance of minerals and its welcome for most foreign investments.
The Australian dollar nearly reached parity with the United States dollar this summer as investors saw it as a way to bet on Australia's commodities boom. Rising Australian exports of iron ore, coal and other natural resources, particularly to China, had prompted Australia's central bank to raise interest rates repeatedly, making the Australian currency even more attractive for investors.
But the currency has plummeted this autumn as commodity prices have fallen and as Australia's financial services and real estate sectors have run into difficulties during the global financial crisis. The Australian dollar was worth just 69 U.S. cents in Monday afternoon trading in Europe.