Published October 21, 2008

Huge forex loss hits Citic Pacific

It accuses senior finance director of unapproved trades

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(HONG KONG) Beijing- backed Chinese conglomerate Citic Pacific, the latest company hit by global financial market turmoil, yesterday warned of potential foreign exchange losses of nearly US$2 billion and accused its senior finance director of conducting unapproved trades.

Citic Pacific bought currency contracts to fund an A$1.6 billion (S$1.65 billion) iron ore mine in Australia, the company said.

The company's bet's on the Australian dollar incurred losses as the currency tumbled 30 per cent against its US counterpart from a 25-year high reached in July.

'The incident shows the company has problems in its internal control as it's too big a potential forex loss,' Kenny Tang, a director of Tung Tai Securities Co, said in Hong Kong.

'The company won't get bankrupted because of its state-owned background but the stock may fall at least 10 per cent tomorrow.'

The firm said mark-to- market losses from leveraged foreign exchange contracts amounted to a whopping HK$14.7 billion (S$2.8 billion) - or nearly a third more than its net profit in 2007.

Stepping in to shore up the firm's liquidity, parent Citic Group, which holds a 29 per cent stake in the listed company, agreed to arrange a standby loan facility of US$1.5 billion for the company, Citic Pacific said.

Chairman Larry Yung, once China's richest businessman, apologised to investors for a problem he said was only uncovered last month. 'There was no reason to believe fraud or other illegal activities were involved,' Mr Yung said in a statement.

Group finance director Leslie Chang had resigned after failing to abide by the company's hedging policy and did not obtain approval before conducting the ill-fated foreign exchange transactions, the firm said.

And financial controller Chi Yin Chau, who also resigned yesterday, had failed to exercise oversight or notify the chairman of unusual hedging transactions, it added.

Efforts to contact the two finance executives through the company were not successful.

The initial estimate of losses was based on prices on the latest practicable date, but final losses would be determined by a number of factors including exchange rates and the volatility of the currency market, the firm said.

Other Chinese companies may also suffer currency losses from their Australian investments, Dariusz Kowalczyk, chief investment strategist at CFC Seymour Ltd, said.

'There have been a lot of transactions by Chinese companies, not just banks but mining companies, buying coal and other assets in Australia,' Mr Kowalczyk said. 'Those assets are worth much less now because the Australian dollar has declined against the Hong Kong dollar and the Chinese renminbi.' - Reuters, Bloomberg