Larry Yung is serious about horseracing. The low-profile billionaire is the owner of a number of prize-winning thoroughbreds and one of only 12 stewards officiating at the exclusive Hong Kong Jockey Club.
In an interview with Time magazine over a decade ago, he explained his infatuation with the sport of kings: “I need excitement. I need betting. I like gambling.”
So perhaps we shouldn’t be surprised that Yung was ousted last week from his role as chairman of Citic Pacific – China’s leading conglomerate in Hong Kong – after an aggressive currency position went disastrously wrong and lost the company $1.6 billion.
His resignation came five months after Citic Pacific first revealed that it faced billions of dollars in losses on contracts on the Australian dollar, apparently designed to hedge Citic Pacific’s mining interests in the region.
When news of the losses first emerged, Yung and his long-serving managing director Henry Fan (who resigned with Yung) both denied knowledge of the derivative commitments. Instead, attention turned to the company’s group finance director, Leslie Chang, as well as its financial controller, Chi Yin Chau. They were the first to depart.
However, over the ensuing months more information has come to light, and what had first been explained as a currency hedge began to resemble a more reckless speculation; the contracts looked more like highly leveraged bets on the Australian dollar’s rise against the US dollar.
Worse yet, the company waited six weeks before informing the market of its exposed financial position. The growing sense of scandal has prompted investigations by the Hong Kong’s Securities and Futures Commission, as well as the Hong Kong police.
In his resignation letter, Yung said: “Faced with this reality, my resignation would be in the best interest of the company.”
Many were shocked by his sudden fall from grace. After all, Yung is no ordinary businessman. His late father, Rong Yiren, was China’s vice president between 1993 and 1998. Hailed as China’s “Red Capitalist”, Rong played a key role in Deng Xiaoping’s economic reforms. And it was with Deng’s blessing that Rong founded China’s first state-owned investment corporation, China Investment Trust and Investment Corp – or Citic – in 1978.
His son (‘Yung’ is the Cantonese pronunciation of the Mandarin ‘Rong’) had greater ambitions than merely inheriting his father’s empire. After moving to Hong Kong 31 years ago, Yung first joined a family-owned electronics factory. In 1986, he then moved to Citic Group, and four years later, along with Fan, he founded Citic Pacific.
Yung’s timing couldn’t have been better. With the imminent handover of Hong Kong to China, many local businesses were eager to establish ties with the Chinese government. For those that wanted an introduction to the mainland, Yung became the man to see. With its formidable political connections in Beijing, Citic Pacific purchased large stakes in two major Hong Kong businesses, Cathay Pacific Airways and Hong Kong Telecommunications – and did so at deeply discounted prices. Since then, Yung has turned Citic Pacific into one of Hong Kong’s most important conglomerates, spanning property, aviation, telecommunications, and steel.
Unlike some of his compatriots, Yung bought into sound, sustainable companies and hired top professional managers. Investors liked him too; Citic Pacific was the first “red-chip” firm (a term given to Hong Kong companies that are controlled by mainland parent companies) to be included in the territory’s Hang Seng Index of blue chip stocks in 1993.
However, Citic Pacific was not entirely without its critics. Over the years, Yung has been accused of lacking a clearly defined investment strategy and of running the company like a family business.
But the recent foreign exchange scandal reflects something different: Citic may have looked like a family run firm, but in reality it was always state-owned. “Because it is a state-owned enterprise, Citic Pacific seems to think that it has the unconditional support from Beijing. Is that why it has become profligate, making these reckless speculations on foreign currency that is borderline gambling?” writes the Hong Kong Economic Journal.
The derivative losses will now be shouldered by Citic’s parent in Beijing. In return, it will get an increased equity stake in the Hong Kong subsidiary. Chang Zhenming, the vice-chairman of the parent company, has been installed to clean up the mess. He will face a tough few months, as he attempts to turn things around and restore Citic Pacific‘s financial stability.
This is not the first time Beijing has had to bail out its Hong Kong unit. During the 1997 Asian Financial Crisis, Citic Pacific’s stock fell more steeply than the rest of the Hong Kong market; at one point, it was down 70% from its peak. According to the Hong Kong Economic Journal, Beijing came to Yung’s rescue with a $300 million subordinated loan to help stabilise the stock price.
This time around, however, Beijing will not be launching the lifeboats – at least not for Yung himself. Perhaps it is also sending the message that no one is so powerful that their survival is guaranteed.
Less than a week after Yung and Fan’s resignation, the country’s Ministry of Finance issued a statement urging Chinese enterprises to be cautious in their financial management amid the worsening global economic environment: “Investment in financial derivatives such as hedging should be conducted prudently and speculative acts are forbidden.” Got it?
Yung now has much more time to reflect on the events of the last few months.
Perhaps he is wishing that instead of risking so much in the complex world of foreign exchange derivatives, he had stuck with punting on the horses.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.