Citic's Problems Blows Right Open!

Posted last year David Webb's Time-Bomb Warning On Citic Pacific Should Not Be Dismiss and also early this year Citic Pacific's Chairman And MD Face Securities Probe.

Flashback of David Webb's article last October.

• It turns out that little old ladies buying minibonds aren't the only ones to have been taken in by structured financial products. Hang Seng Index member (for now) CITIC Pacific Ltd (CP, 0267.HK) stunned the market this evening with the extremely late announcement that they are sitting on realised and unrealised losses of HK$15.5bn (US$1.99bn), due to foreign exchange exposures the Company was aware of six weeks ago (although the losses have grown) but had failed to tell investors until now.

On today's Edge Financial Daily Auditor finds irregularities at Citic Securities, shares fall. ( Citic Securities which is China's BIGGESTbrokerage company and Citic Pacific is the company's listed unit in Hong Kong)

• SHANGHAI: Citic Securities Co said today that state auditors had discovered some irregularities at the firm, sending shares of China's biggest-listed brokerage tumbling.
  
  China's National Audit Office spotted problems in Citic Securities' financial treatment of incentives related to its brokerage business, the Beijing-based company said in a statement to the Shanghai Stock Exchange.
  
  The irregularities occurred in 2007, before related rules were published, and would not have any impact on the company's performance or published results, it said.
  
  In a routine check last year, state auditors also uncovered irregularities at Industrial & Commercial Bank of China (ICBC) and China Construction Bank (CCB), according to separate exchange filings. Corrections had been made and the findings had no impact on business, both lenders said.
  
  Citic Securities shares fell nearly 5% at one point before closing 2.88% lower at 28.32 yuan (RM14.69). That compares with a 0.12% dip in the benchmark Shanghai Composite Index.
  "The impact of such problems should be short-term and negligible. The market is over-reacting," said Tian Liang, analyst at Ping An Securities Co. "We're optimistic on the future performance of the company, which would benefit from big stock market turnover and upcoming initial public offerings (IPOs)."
  
  ICBC shares rose 1.31% and CCB shares ended up 3.31% in Shanghai, lifted by a broader rise in banking shares.
  
  Citic Securities shares have gained more than 50% this year, as the stock market rallied and trading volume surged. Citic Securities also stands to benefit from China's resumption of initial public offerings this month.
  
  Next year, big companies such as Agricultural Bank of China and China Mobile may sell shares publicly in China, potentially giving Citic Securities a boost in underwriting revenue, analyst Tian said.
  
  Citic Securities' problems were found in a state audit conducted between March and June last year at its parent Citic Group, China's biggest financial conglomerate.
  
  The inspection came after the group's Hong Kong-listed unit, Citic Pacific, posted US$2 billion (RM7.1 billion) in losses from unauthorised bets in volatile foreign exchange markets.
  
  In addition to Citic Securities, irregularities were found at some other units of Citic Group, the statement said.
  
  Citic Securities' problems occurred in 2007, before the government published rules in April 2008 to regulate the country's brokerage business, the company said in the statement.
  
  "We paid high attention to the government audit, and actively cooperated," Citic Securities said. "We corrected our mistakes as we were being audited." — Reuters

Citic Pacific's Chairman And MD Face Securities Probe

Posted last year: David Webb's Time-Bomb Warning On Citic Pacific Should Not Be Dismiss

On today's Bloomberg, Citic Pacific’s Yung and Fan Face Securities Probe

• Jan. 2 (Bloomberg) -- Citic Pacific Ltd., predicting $2.4 billion of losses from currency derivatives, said the Securities and Futures Commission is investigating its chairman and managing director in relation to the bets.
  
  Chairman Larry Yung, 66, and Managing Director Henry Fan are among the 17 directors being probed, Citic Pacific said today in a statement to the Hong Kong stock exchange, without elaborating. The commission had announced the investigation on Oct. 22 without giving details.
  
  Chairman Yung, son of a former Chinese vice president, had to seek a bailout from parent Citic Group after wrong-way bets on the Australian currency, disclosed on Oct. 20. The board was criticized for a six-week delay in revealing the losses by lawmakers and shareholder activist David Webb.
  
  Citic Pacific rose 22 percent to HK$10.20 on the Hong Kong exchange today. The statement came after the market closed.
  
  The company, which makes steel and develops property, learnt of the currency agreements on Sept. 7. On Sept. 12 it issued a circular saying “directors are not aware of any material adverse change in the financial or trading position of the group since 31 December 2007,” when announcing a connected transaction.
  
  The company’s shares fell 42 percent between Sept. 7, when the board learned of the exposure, and Oct. 20. The city’s benchmark Hang Seng index dropped 23 percent in the same period.
  
  Unapproved
  
  Yung had said Financial Director Leslie Chang, 54, didn’t follow hedging policy and failed to seek his approval for the transactions. Chang and Financial Controller Chau Chi Yin were ousted for the trades.
  
  Should the September company circular contain a misleading statement, that would be an offence for which the company and directors could be prosecuted, Webb, a former independent director at the exchange, had said on his Web site. The maximum penalty is a fine of HK$10 million ($1.3 million) and 10 years jail, he said.
  
  Chairman Yung is the son of Rong Yiren, who had set up Citic Group in the 1970s as a state vehicle for foreign investment. Managing Director Fan, 60, stepped down from Hong Kong’s cabinet as well as taken a leave of absence from other government appointments after the loss disclosure.
  

David Webb's Time-Bomb Warning On Citic Pacific Should Not Be Dismissed

The following editorial from David Webb should be read in full!

• It turns out that little old ladies buying minibonds aren't the only ones to have been taken in by structured financial products. Hang Seng Index member (for now) CITIC Pacific Ltd (CP, 0267.HK) stunned the market this evening with the extremely late announcement that they are sitting on realised and unrealised losses of HK$15.5bn (US$1.99bn), due to foreign exchange exposures the Company was aware of six weeks ago (although the losses have grown) but had failed to tell investors until now.
  
  The losses involve exotic foreign exchange forward contracts such as "dual currency target redemption forward contracts", where they get a limited upside (due to a knock-out clause) and an unlimited downside, being required to take the weaker of the Australian dollar and Euro. Another series of "AUD target redemption forward contracts" involves receiving up to AUD9.05bn in monthly instalments up to October 2010. The counterparty bank(s) for these contracts have not been disclosed, and CP did not say when the contracts were entered into. They should tell investors how long this time-bomb was ticking. If the exposure pre-dates the interim report for 30-Jun-08 or even the audited annual report for 31-Dec-07 then it raises additional questions. On this, the two reports said (p120 of the annual report):

Read rest of article: http://webb-site.com/articles/citicbomb.htm

And of course the key issue was:

• Why did CITIC Pacific's board wait 6 weeks before telling investors that it had a huge exposure to exotic foreign exchange forward contracts? What does this say about the quality of its board, and the independent directors on its audit committee who, according to a separate statement by the Chairman, found time to complete an investigation of the incident even before the incident was announced?

Even Clare Barnes from Apollo Investment has something to say too!

• Mainstream press reports of CITIC Pacific's US$2bn losses on FX contracts are inadequate. The contract details are interesting (and the losses relative to upside should be salutary), but this is of wider importance for Hong Kong corporate governance: read David Webb on CITIC Pacific's time bomb. This news update mentions counterparties including HSBC, BNP, and Citigroup, and the interesting term "accumulator", which some would associate with the racetrack...