Citic Pacific reported huge loss from currency bets

Citic Pacific Ltd., the Hong Kong arm of CITIC, China's biggest state-owned investment company, said it may lose as much as HK$15.5 billion ($2 billion) from unauthorized currency bets and replaced two finance executives.

A loss of HK$808 million has been incurred from terminating some leveraged currency contracts, and it's sitting on further potential losses of HK$14.7 billion, the Hong Kong- listed company said in a filing. Its parent will provide a standby loan of $1.5 billion.

The loss position is from the company’s bets on the Australian dollar as the currency tumbled 30 percent against its U.S. counterpart from a 25-year high reached in July. Citic Pacific bought currency contracts to fund an A$1.6 billion ($1.1 billion) iron ore mine in Australia. The potential loss of as much as HK$15.5 billion represents almost half of Citic Pacific's market value.

In this global financial turmoil, we will see other Chinese companies may suffer currency losses from their Australian investment. There have been a lot of transactions by Chinese companies, not just banks but mining companies, buying coal and other assets in Australia. The bad thing is most of them don’t have hedging positions against those currency exposures. As the commodity bubble burst, these investments would worth much less than their initial values.