A case of I thrill you later for Citic Carol Chan Jul 29, 2009 |...

A case of I thrill you later for Citic


Carol Chan
Jul 29, 2009

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When state-backed conglomerate Citic Pacific (SEHK: 0267) made a wrong-way bet on the Australian dollar last year, heads rolled and the potential losses were counted in the billions.
Now the company's parent, Citic Group, could be poised to make a mountain of money from those initially bad investments it was forced to take over. The reason: a rebound in the Australian currency.



When Citic Group assumed A$5.3 billion of Citic Pacific's risky Australian dollar forward exchange contracts - known as accumulators but dubbed "I kill you later" by investors - and took control of the firm in December, it also assumed further big losses. But it now stands to make a paper profit in excess of HK$22 billion from a gain in both the Australian dollar and its Citic Pacific stake.

"Citic Group could grab a handsome profit because of the recent surge in the Australian dollar, but its risks are also high, as you don't know where the currency will go," said Kenny Tang Sing-hing, head of research of Redford Securities.

"You also don't know whether Citic Group has closed or restructured the contracts."

A Citic Group spokesman was unavailable for comment.

The Australian dollar yesterday reached a high for the year against the greenback of 83 US cents as investors bet the Reserve Bank of Australia would start raising borrowing costs. The currency has risen about 19 per cent this year.

Citic Group initially faced multibillion-dollar losses from the wayward investment decisions of its subsidiary. The "foreign-exchange accumulators" automatically terminate if the Australian dollar reaches a predetermined cap. However, losses are unlimited if the currency falls.

Citic Pacific booked a HK$14.63 billion loss from the currency derivatives last year. Citic Group could make a HK$5.9 billion profit on them.

Meanwhile, the Citic Pacific shares Citic Group bought at HK$8 each have risen about 132 per cent this year, and closed at HK$19.44 yesterday. Based on the 1.45 billion shares it bought, which virtually doubled its stake in the Hong Kong-listed company to 57.6 per cent, the stake is worth HK$16.6 billion more.