Citic Pacific's Woes Uncloak Web Of Clout
A bad currency bet has turned one of corporate China's most prestigious names into its leading contribution to the roster of global financial-crisis losers.
Citic Pacific Ltd., a Hong Kong-listed conglomerate whose impeccable China connections helped give rise to the term 'red chip,' has seen two-thirds of its market capitalization wiped out in two days of trading. More than half a billion dollars has now disappeared from the portfolio of its 66-year-old, mainland China-born chairman, Larry Yung, whose late father, the country's former vice president, was known as the 'red capitalist' for his business smarts.
The selloff follows revelations that the company could lose 15.5 billion Hong Kong dollars (US$2 billion), and possibly more, because of leveraged positions on the Australian dollar.
On Wednesday, Hong Kong's Securities and Futures Commission and the city's stock exchange both said they were investigating Citic Pacific for possible rule violations. The news made for a sticky situation, because Citic Pacific's managing director, Henry Fan, is a director of the company that owns the stock exchange. As further evidence of Citic Pacific's establishment clout, Mr. Fan also is chairman of a regulatory panel on takeovers and mergers at the SFC.
To avoid possible conflicts of interest, Mr. Fan took leaves of absence Wednesday from both posts. He declined to comment Wednesday, citing the regulatory investigation. Mr. Fan also is an appointed adviser to Hong Kong's chief executive, Donald Tsang.
Over the years, Citic Pacific embodied mainland China's ever-deepening economic presence in Hong Kong through its stakes in the city's flagship airline, cross-harbor tunnels and property projects.
'Citic Pacific has a lot of influence in Hong Kong, and Mr. Yung has come to represent China's first generation of Chinese capitalists,' says James Sung, a political scientist at City University of Hong Kong.
Mr. Yung and his company retain deep ties to China's Communist leadership. Citic Pacific's parent, Citic Group, was founded by his father, Rong Yiren, in 1978 at the behest of Chinese leader Deng Xiaoping. Mr. Rong led Citic's mainland Chinese business until 1993 and later became the country's vice president.
Mr. Yung was born in Shanghai in 1942 into the wealthy household of his father, an industrialist who ran dozens of flour and cotton mills and who became Shanghai's vice mayor in 1957. He grew up in a courtyard house decorated with porcelains, antiques and ancient art, according to a profile of Mr. Yung last year in the state-run People's Daily, spending money lavishly while cruising around in a red convertible sports car.
When the political winds changed during the Cultural Revolution of the 1960s, Mr. Yung was sent to the countryside for 'labor re-education,' forced to dig holes and labor in remote Sichuan province. When free-market reforms began sweeping across China after the death of Mao Zedong, Mr. Yung in 1978 moved to Hong Kong and got into business using money his father had socked away.
In 1986, Mr. Yung joined the Hong Kong operations of Citic Group, and by the next year, he had taken control of Citic Hong Kong during a company restructuring. Later, the company bought a controlling interest in a quiet Hong Kong-listed company, renamed it Citic Pacific, and used it to begin acquiring assets. It took big passive stakes in companies like Cathay Pacific Airways, in which it still holds a 17.5% stake today. Mr. Yung, meanwhile, cultivated close relationships with tycoons like Li Ka-shing.
Over the years, the company took big stakes in infrastructure and property projects, including tunnels, shopping malls and power plants in Hong Kong and mainland China. In the mid-1990s, investors eager to bet on a well-connected player helped drive the stock price higher. At the same time, Mr. Yung accumulated what today amounts to about a 19% stake in the company, in addition to Citic Group's 29% stake, making him one of China's richest men.
But the Citic Pacific currency debacle comes after several other recent controversies involving top officials and business leaders in Hong Kong. Lawmaker Albert Ho on Wednesday described the incident as another reminder of the conflicts of interest built into this city's closely knit political and business establishment and called on Mr. Fan, Citic Pacific's managing director, to step down permanently from his regulatory posts.
The company's recent troubles apparently arose from its growing interests in Australian iron-ore mines, an investment that dovetails with China's increasing appetite for natural resources to feed its economic growth. A capital-intensive business, the mining investment requires the company to buy equipment and supplies in Australian dollars.
It isn't unusual for companies to hedge their foreign-currency exposure. But Citic Pacific did something more: It turned to structured products dubbed 'accumulators' that obligated it to buy a specified amount of Australian dollars -- in this case, about nine billion Australian dollars (US$6.1 billion at current exchange rates), at a fixed price.
The Australian dollar's sharp downturn in recent months, a side effect of the global credit crunch, has left Citic badly exposed. Already, the bets have cost the company HK$807.7 million in realized losses and would cost it HK$14.5 billion more if they were marked to market at current values. Because Citic Pacific retains open positions, the losses could deepen if the Australian dollar continues to slide against the U.S. dollar.
Mr. Yung has blamed the debacle on the company's group finance director, Leslie Chang, as well as its group financial controller, Chi Yin Chau. Both were ousted, while Frances Yung, the 36-year-old daughter of Mr. Yung and head of the finance department, would have her duties adjusted and her pay slashed. But increasingly, critics are questioning the role of Citic Pacific's senior management in the affair.
Mr. Ho, the legislator, accused the company of deliberately hiding its financial position. Mr. Yung had said that management knew about the speculative losses six weeks ago but said the company didn't immediately disclose the problem because it wanted to unwind some of the trades first.
The appendix to a Sept. 12 public filing by Citic Pacific made five days after management says it first learned of the losses reads: 'The directors are not aware of any material adverse change in the financial or trading position of the group since Dec. 31, 2007.'
On Wednesday, both Mr. Yung and parent Citic Group raised their stakes slightly in Citic Pacific. Citic late Wednesday said Mr. Yung had spent HK$7.37 million to buy one million shares and raise his stake to 19.17% from 19.12%, while China's state-run Citic Group spent HK$14.78 million buying Citic Pacific stock to raise its stake to 29.44% from 29.35%. |
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