Corporate Governance at Citic Pacific

Running head: Corporate Governance at Citic Pacific

Corporate Governance at Citic Pacific

Mary Sanders

AC557: Internal Control Assessment and Design

January 19, 2016

Company and Situation

        China International Trust and Investment Corp (CITIC Pacific) was established in 1978 by Yiren Rong. CITIC was established “to pioneer reform in the financial sector, lure foreign investment and technology to China and develop international business” (Ko, p.2). Yung Rong soon became chairman of CITIC HK in 1990 leading to them being publicly traded on the Hong Kong Stock Exchange. The company was considered at ‘red-chip company’ meaning they had to meet corporate governance and other reporting standards of HKEx. Citic Pacific business consisted on special steel manufacturing, mining iron ore, and property development in China.

        Citic Pacific took pride in its corporate governance stating “they were committed to excellent standards of corporate governance.” In addition, they were also the first Hong Kong companies to appoint an Audit Committee, issue a Code of Conduct and have a strong internal audit function. Despite having these values on October 20, 2008 the company announced losses of US$2 billion, due to foreign exchange contracts. This lead to Citic’s stock plunging by 55% once announced. The cause of this loss was due to an investment in iron ore mining in Western Australia. The capital estimated to 2010 of expenditure requirement was $1.6 billion (US $ 1.04 billion). Also, there was a lower requirement for capital of €85 million ($ 107 million). Because they were appreciating the Australian dollar and the Euro against the US dollar, the company wanted to ensure the price that would have to pay for this investment. The company entered into derivative contracts of currency based on its assumption that would continue to appreciate the Australian dollar and the euro. However, the Australian dollar and the euro depreciated against the dollar. This produced a great loss for the company.

Strengths, Weaknesses and Alternatives

        One of the biggest downfalls of Citic comes from the managers who made decisions to use foreign exchange derivative contracts for appreciation. Leslie Li-Hsien was the finance director began entering into “foreign exchange accumulators”. This allowed the use of contracts such as a dual currency target redemption forward contract, AUD target redemption forward contracts, and daily accrual contracts for AUD.  Dual currency target redemption allows the company to get a limited profit, due to an upper limit being set, and an unlimited downside. The AUD target redemption forward contract and the daily accrual contract work together having the company receive AUD against delivery of USD linked by exchange rates. Once the maximum aggregate profit is reached the contract is knocked out however this doesn’t occur for losses. This allowed the group to receive up to A$9.05 billion up to October 2010. With expected appreciation of the Australian dollar they assumed this was a good option (SEC,). On 7 September 2008 Citic HK became aware of these issues. This lead to a foreign exchange contracts loss of HK$626.6 million and between 8 September 2008 and 13 October 2008 an additional HK$64.3 million was lost.