Citic Pacific could lose $2 billion from foreign exchange trading (original) (raw)

https://www.nytimes.com/2008/10/20/business/worldbusiness/20iht-citic.3.17108990.html

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Oct. 20, 2008

HONG KONG — A Hong Kong conglomerate controlled by China's biggest state-owned investment company said Monday that it had realized losses of 104milliononill−timedcurrencytransactionsandwouldloseanadditional104 million on ill-timed currency transactions and would lose an additional 104milliononill−timedcurrencytransactionsandwouldloseanadditional1.9 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.

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