Foreign Exchange Losses Rock Citic Pacific

A Hong Kong investment firm backed by the Chinese government is struggling to recover from a staggering, HK$ 14.7 billion loss tied to leveraged foreign exchange contracts. Citic Pacific (HKSE: 00267) announced the resignations of two financial officers blamed for the sour contracts, which were aimed at limiting the currency exposure of an iron ore mining project in Western Australia. Citic Pacific’s parent, state-owned Citic Group, offered to strengthen the firm’s liquidity with a US$ 1.5 billion loan.

Citic Pacific Chairman Larry Yung said the forex deals were made “without proper authorization” and that the risk was “not evaluated correctly.” An internal audit found no evidence of fraud. But other investment firms that have speculated on the Australian and New Zealand dollars may report similar losses in the future.

Government Tries Reversing Real Estate Slump

The government has intervened to support China’s faltering housing market. Authorities cut the minimum mortgage rate to 5.29 percent and down payment to 20 percent for first-time homebuyers. Meanwhile, the Ministry of Finance reduced the deed tax to 1 percent for first-time buyers of small apartments, waived the stamp tax for individual buyers and sellers, and suspended the VAT for sellers. Local governments also may trim taxes. China’s central bank lowered the minimum mortgage interest rates but opted to allow banks to set their own rates.

But the effort is not guaranteed to work. Urban developer Pan Shiyi, chairman of Soho China, said government measures will have little effect on the market. Some insiders said that the central government won’t pass massive bail-out policies because higher housing prices would certainly upset the public.

Overhaul for Debt-Laden Agricultural Bank

The government announced a restructuring for the Agricultural Bank of China (ABC), closing another Chinese bank reform chapter. By shifting 800 billion yuan in bad debts to an asset manager and depositing 130 billion yuan, the government breathed new life into ABC, whose non-performing loan rate was 23.5 percent in late 2007. The move may lead to an IPO next year, although it’s unclear whether ABC－the only major state bank not publicly traded － would be listed in Shanghai or Hong Kong.

The Ministry of Finance and Central Huijin were each given 50 percent stakes. Undecided is whether ABC will become a commercial bank or continue operating as a rural policy bank. The first option would provide more opportunities for profit, while the second would gear services toward farmers.

Death Sentence with Reprieve for Beijing’s Ex-Official

Liu Zhihua, a former vice mayor of Beijing, received a death sentence with a two year reprieve October 18. He was convicted of accepting bribes totaling 7 million yuan, and for abuse of power after awarding several construction projects to his mistress’ construction company. From jail, Liu has appealed the court decision in hopes of winning a reduced sentence and assets for his wife and son. Meanwhile, Liu’s mistress also faces bribery charges.

Liu’s downfall dates to 2006, when details of construction project corruption emerged in Beijing. The former official and his lady friend made a fortune on major projects including the Capital Museum, creation of a “green belt” in western Beijing to improve air quality for the Olympics, and three Olympic stadiums. Several local developers also were involved.

Billions Vanish in Sinosteel’s Black Hole

More than 2.5 billion yuan disappeared into a financial black hole at Sinosteel, a steel group that’s also China’s second biggest iron ore trader. An unsigned notice on Sinosteel’s internal Web site in mid-July said the money vanished after the company paid a 6.62 billion yuan advance for unfinished steel to troubled Shanxi Zhongyu Iron and Steel Co. The payment in the second half 2007 included an apparently unrecoverable 2.56 billion yuan. Shanxi Zhongyu is undergoing a government restructuring. The loss prompted Sinosteel to shelve a scheduled IPO last spring.

But that may be only the tip of the iceberg for Sinosteel. A source said the company paid similar advances to a Hebei Province steelmaker. Sinosteel was expanding aggressively at home and overseas before the industry sputtered this year.