HONG KONG - Doubts have been raised over the future of Hong Kong's status as an
international financial center and its autonomy under the vaunted "one country,
two systems" form of government following Citic Pacific's warning last week
that it faced losses of as much as US$2 billion from unauthorized
foreign-exchange bets.
The company is one Hong Kong's 93 "red chips" - that is, mainland companies
incorporated and listed in the former British territory, with Chinese
controlling shareholders. Citic Pacific’s largest shareholder is Citic Hong
Kong (Holdings) Ltd, a wholly owned subsidiary of Citic Group, which comes
under the control of the Chinese government's State Council, or cabinet.
The company was aware as early as September 7 of the degree
of exposure it faced arising from its forex contracts, yet it released a
circular on September 16 indicating that there was no adverse information that
it should declare to the market. "[S]ave as disclosed in this Circular, the
Directors are not aware of any material adverse change in the financial or
trading position of the Group since 31 December 2007, the date to which the
latest published audited accounts of the Company were made up," the statement
said.
It was not until six weeks later that the scale of possible losses was made
public.
Citic Pacific chairman Larry Yung Chi-kin on October 21 warned of losses of up
to HK$15.5 billion (US$2 billion) from unauthorized foreign currency trades. He
said the company had booked a HK$808 million loss on the termination of
leveraged foreign exchange contracts, or "currency accumulators", and warned of
a further HK$14.7 billion loss on outstanding contracts.
So far, the Hong Kong government has not indicated any action it intends to
take, raising questions as to whether the company's directors will be protected
by the close links between Citic and the ruling elite in China. Similar losses
at other Chinese companies based in Singapore and in the mainland have led to
criminal prosecutions.
Citic Group was established in October 1979 by Yung’s father, Rong Yiren, a
former vice president. Citic was conceived by then Chinese leader Deng Xiaoping
as a window for China’s opening up, and it has since played an important role
in attracting foreign capital to China. In 1986, Citic Group acquired Hong
Kong-listed Pacific Development and renamed it Citic Pacific, which become the
first red-chip company in Hong Kong.
Two senior executives have resigned as directors of the company following
disclosure of the possible losses. Yung said at a press conference that
disciplinary action will also be taken against other staff members associated
with the unauthorized trading, he didn’t mention his daughter, Frances Yung
Ming-fong, Citic Pacific’s director, finance department, until the media asked
the following day about her situation.
Managing director Henry Fan Hung-ling, who sits on the board of the city's
stock regulator, the Securities and Futures Commission, and of the stock-market
operator Hong Kong Exchanges & Clearing Ltd, then told the media that
Frances Yung had been demoted and had her salary cut for her involvement in the
unauthorized foreign-currency bets. Fan, 60, himself has asked to step down
from his positions with the commission and exchange as they investigate Citic
Pacific, and from Hong Kong's Executive Council, of which he was one of 14
non-unofficial members.
Larry Yung, however, continues so far to keep his post as Citic Pacific
chairman. The parent Citic Group has given Citic Pacific a US$1.5 billion loan,
but appears to have taken no disciplinary action. The group planned to
restructure Citic Pacific’s board of directors by sending more members to help
with financial duties, Larry Yung was quoted as saying by the Hong Kong
Economic Times on Monday. He denied that Citic Group planned to sack him and
other senior managers and reaffirmed that the parent company would continue to
support Citic Pacific. He also stressed Citic Pacific would not sell the
company’s assets at firesale prices.
Democratic Party chairman Albert Ho Chun-yan drew attention to the precedent of
China Aviation Oil (Singapore) Corp, a Singapore-listed jet fuel trader, which
lost US$550 million by betting wrongly that oil prices would fall. The
company's then chief executive, Chen Jiulin, was subsequently sentenced by a
Singapore court for more than four years’ imprisonment for making false
statements and for breaches of fiduciary duty.
Similarly in the mainland three years ago, a former export-import director of
the the State Regulation Center of Supplies Reserve, which manages China's
metal reserves on behalf of the State Reserve Bureau, lost about US$200 million
by betting on overseas copper prices. He was sentenced by a Beijing court to
seven years in jail for his role in the scandal.
"How Hong Kong handles the matter has important implications for the principles
of 'one country, two systems' and the high level of autonomy that the central
leadership pledged," Ho said, referring to the agreement under which the UK
handed Hong Kong back to China in 1997.
The Democratic Party is helping a group of Citic Pacific shareholders who are
seeking to assign responsibility and claim compensation for their losses
following a 70% plunge in the company's share price since the scandal,
involving wrong-way bets on the Australian dollar, broke.
Benny So, a retired civil servant, who bought 10,000 Citic Pacific shares on
October 15 for HK$160,000, five days before the failed bets were made public,
said had he known the company had financial problems, he would not have bought
its shares.
"Citic Pacific should buy back the shares bought between September 7, when
management first became aware of the problem, and October 20, when they
revealed it to the public. Citic Pacific has violated the Hong Kong Exchanges
and Clearing rule that information that may affect share prices should be
promptly disclosed," he said.
The support group planned to file an application seeking an independent
investigation by the government.
David Webb, an activists for shareholders rights in Hong Kong, said on his
Webb-site.com, that the Citic Pacific announcement on September 9 contained "a
false and misleading statement",as the firm said that directors were "not aware
of any material adverse change in the financial or trading position of the
Group since December 2007". The Securities and Futures Commission and Hong Kong
Exchange and Clearing earlier said that they were looking into the case to see
whether it involved any violation of listing rules.
A retail investor who bought the company’s shares in September said
shareholders of the company could no longer trust their management and cast
doubts over Hong Kong’s handling of the issue, citing the close relationship
between the red-chip conglomerate and Beijing.
"The company and its management should be criminally liable because they
knowingly and willfully disregard conditions that led to investment loss that
retail investors would suffer," he said.
Last year, Citic Pacific reported a record high profit of HK$10.8 billion, up
31% year-on-year. The possible losses from the unauthorized forex trading could
dwarf that amount.
Zhang Xing, at the research institute of trust and wealth management under the
Southwest University of Finance in Chengdu, said Citic needed to buy currency
forward contracts to protect an investment in an iron ore mine in Western
Australia.
"But the contracts allowed only limited profit on the upside and exposed the
company to unlimited losses on the downside, which is the opposite of a
property hedging strategy," Zhang said. Citic Pacific’s mark-to-market loss is
estimated at HK$14.7 billion based on the exchange rate of one Australian
dollar to 70 US cents, he said.
As Citic Pacific’s outstanding forward contracts reached A$9.4 billion (US$6.4
billion), the company’s losses could snowball to HK$26 billion if the
Australian dollar dropped to 50 US cents, according to investment bank
Citigroup. On Thursday, one Australian dollar was worth 68.56 US cents.
Citic is not the only Hong Kong listed company raising concern about corporate
governance and may draw scrutiny towards Hong Kong's regulatory independence.
State-owned China Railway Group, one of Asia's largest construction companies,
last Thursday announced a net foreign exchange loss of 1.94 billion yuan
(US$283 million) for the first nine months of the year after betting wrongly on
the direction of the Australian dollar.
The day before the announcement, China Railway shares plunged 20.58% to
HK$4.09. The stock fell a further 7.09% after the announcement last Thursday,
and on Tuesday declined 8.45% to close at HK$3.25.
China Railway, which was listed in Hong Kong last November, said in its 2008
half-year report that it had used structured financial products to hedge
against foreign exchange risks.
Kowloon Development last Friday announced that it had lost an estimated HK$3.7
billion through equity and derivatives investments. JP Morgan criticized
Kowloon Development for failing to disclose details of its securities portfolio
and related risks in its first-half earnings announcement on September 24, and
only mentioning the exposure in the full report a week later. Shares in the
company plunged by as much as 75.2% on Tuesday, its first trading day after
being suspended on Friday. The Hong Kong and Macau developer ended Tuesday down
41.4% at HK$1.55.
The developer said it had booked HK$688 million in losses for the first half,
while losses of about HK$3 billion were incurred between July 1 and October 22.
The deficits came from changes of fair value in its financial investments and
unwinding of forward agreements. The company still had HK$469 million in
financial investments as of October 22 and the purchase commitment of its
remaining forward agreements were worth HK$856 million, suggesting additional
losses may be incurred.
Olivia Chung is a senior Asia Times Online reporter.
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