Citic Pacific was not alone in revealing massive losses last week. China Railway Group (CRG) and China Railway Construction Corporation (CRCC) revealed foreign exchange hedging losses of CNY1.94 billion ($284 million) and CNY320 million ($46.8 million) respectively just days after Citic said it could lose as much as $1.9 billion from its own currency agreements.
The two companies, both listed on the Hong Kong stock exchange, were forced to disclose their losses amid growing speculation over their currency exposures.
CRG, a state-owned builder of railway lines, said that its FX losses were due to its investments in foreign currencies, particularly in the Australian dollar. The company had progressively invested the equivalent of USD 1.5 billion in high-yield structured currency deposits in the first half of 2008 but had remained in these currencies after the deposits matured on 30 September 2008. These high yield currencies, particularly the AUD, have collapsed since mid year.
The company is now seeking ways to minimise its exposure to the foreign exchange fluctuations, including establishing a special task force to closely monitor market movements and solicit professional advice. Officials at the company also note that it had State Administration of Foreign Exchange (SAFE) approval to make its foreign currency investments earlier this year.
Similarly, CRCC said its FX losses were due to foreign currency deposits which fell in value amid the global financial crisis. It had deposits equivalent to CNY18.7 billion ($2.73 billion) including USD and HKD deposits worth CNY13.8 billion, AUD deposits equivalent to CNY1.5 billion and deposits in currencies of Algeria, Saudi Arabia, Nigeria, and Libya amounting to CNY3.4 billion. CRCC says it plans to convert its FX deposits into Chinese currency as soon as possible.
Meanwhile, SAFE will require Chinese financial institutions under its regulatory remit to submit monthly reports on their foreign currency assets and liabilities.
Given the losses by Citic (see related story) and the two railway construction firms, Chinese regulators are tightening supervision of domestic firms’ foreign currency hedging and investment activities.