Citic Pacific Tied to Australian Dollar After Currency Losses

By Bob Chen and Theresa Tang

Oct. 23 (Bloomberg) -- Citic Pacific Ltd.'s attempt to manage currency risk means the Chinese steelmaker and property developer has four times more money riding on the Australian dollar than it earned last year.

The unit of China's largest state-owned investment company has contracts committing it to buy as much as A$9.44 billion ($6.3 billion) of the currency, according to an Oct. 20 statement. That's more than quadruple Citic Pacific's market value yesterday, and compares with 2007 net income of HK$10.8 billion ($1.4 billion).

Citic Pacific has plummeted 66 percent in Hong Kong trading since disclosing it has an unrealized loss of HK$14.4 billion on the contracts, which force it to purchase Australian dollars at an average price of 87 U.S. cents. The currency fell 0.6 percent to 66.4 cents as of 10:50 a.m. in Sydney.

``If you buy the stock, you're taking a view on Australian dollars,'' said Billy Ng, a Hong Kong-based analyst at JPMorgan Chase & Co. ``I won't recommend buying, even at this price,'' he said of the stock.

Shares of Hong Kong-based Citic Pacific tumbled 25 percent to HK$4.91 percent yesterday, after a 55 percent drop Oct. 21. Australia's dollar will appreciate to 72 U.S. cents next year, the median forecast of 25 analysts surveyed by Bloomberg shows.

The Australian dollar may trade as low as 50.45 U.S. cents through March 31, according to Divyang Shah, chief strategist in London at CBA Europe, a unit of Commonwealth Bank of Australia. Shah expects the Australian dollar, will be worth 59 U.S. cents at the end of the first quarter of 2009.

Global Losses

Companies around the world are posting losses on foreign exchange hedges amid record high volatility in currency markets. In Brazil, a pulp producer, a poultry company and a cement maker have reported $2.3 billion in losses on currency derivatives. Korean companies may lose as much as $2.2 billion on such contracts, according to Standard & Poor's.

Central banks and governments are pumping unprecedented amounts of cash into the financial system and banks that lost money on derivatives and asset-backed securities.

Citic Pacific's largest position was in so-called Australian dollar target redemption forwards, according to the company, which didn't elaborate. Such over-the-counter contracts aren't traded on an exchange. They differ from typical forwards, or agreements to buy and sell assets at current prices for delivery at a specified time and date, in that they are customized for clients.

The total notional value of outstanding foreign-exchange OTC derivatives in the world increased 78 percent in the two years ended 2007 to $56 trillion, according to the Bank for International Settlements in Basel, Switzerland.

Australia Project

``They have gotten very popular in the last three years and a lot of people have been hurt already,'' said Joseph Ngai, a principal for the financial services sector in Hong Kong at McKinsey & Co., a New York-based consultancy. ``When prices fall, you have to keep buying at a loss.''

Citic Pacific didn't give details of the contracts, except to say that they would deliver a maximum of A$9.44 billion, while its U.S. dollar losses weren't limited. The company said it plans to take delivery of some of the currency, known as the Aussie, because it needs to finance an A$1.6 billion iron ore project in Australia.

``The contracts they're holding will track the Aussie dollar, so if the Aussie dollar goes up then they will go up about the same amount,'' Jackson Wong, an investment manager at Hong Kong- based brokerage Tanrich Securities Co., said in reference to the stock. Wong, who declined to say how much he manages, said he bought Citic Pacific shares.

The Australian dollar was trading close to its 25-year high of 98.49 U.S. cents when Chang and Chau bought the forwards. The contracts have an average strike price of 87 U.S. cents to the Australian dollar.

Unauthorized Trades

Citic Pacific ousted Financial Director Leslie Chang, 54, and Financial Controller Chau Chi Yin, 52, this week because the company said the trades weren't authorized. The contracts incurred losses as the Australian dollar tumbled about 30 percent against its U.S. counterpart from a 25-year high reached in July. Chang and Chau couldn't be reached for comment.

Chang and Chau ``didn't understand the potential downside risks,'' Managing Director Henry Fan said in an Oct. 21 interview.

HSBC Holdings Plc, BNP Paribas SA and Citigroup Inc. were among the banks who sold the derivatives, according to the company. Spokespeople for the banks declined to comment. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events, such as the weather or changes in interest rates.

`Great Unwinding'

The Securities and Futures Commission in Hong Kong said it started an investigation of Citic Pacific, without giving details. Hong Kong Exchanges & Clearing Ltd., which runs the city's bourse, is also ``looking into'' whether the company complied with listing rules, said Henry Law, a spokesman.

``I'm not quite sure how many understood what they bought, but when everything was going up in a straight line it looked very sensible,'' said Song Seng-Wun, an economist at CIMB-GK Securities Pte Ltd. in Singapore. ``The great unwinding will see more casualties I suspect.''

To limit losses, Citic Pacific has started to cancel some of the contracts, costing it $104 million.

``It's not necessary for Citic Pacific to wind up all of its Australian dollar contracts as it still needs the currency to run its iron ore project,'' said Patrick Chow, an analyst at Everbright Securities in Hong Kong. ``Still, it's difficult to predict what Citic Pacific would do as the visibility of the outlook of the Australia dollar is low.''

To contact the reporters on this story: Bob Chen in Hong Kong at bchen45@bloomberg.net; Theresa Tang in Hong Kong at ttang3@bloomberg.net;