Banking & Finance

Opening salvo

SOE reforms off to slow start as Citic faces landmark lawsuit

CITIC Pacific Chairman Larry Yung attends a news conference in Hong Kong

Facing legal proceedings: Yung

If you can get off to a good start it means you are half way to success, a Chinese proverb suggests. But if that’s the case, Beijing’s showcase effort for state-owned enterprises reform looks to have missed the starter’s whistle.

Last month Citic Pacific officially changed its name to Citic Ltd. The renaming brought a successful conclusion to the $37 billion backdoor listing of the Citic Group, China’s biggest state conglomerate (see WiC232).

The company began trading with its newly minted brand on September 1 in Hong Kong. Less than two weeks later, however, Hong Kong’s Securities and Futures Commission (SFC) announced it had launched legal proceedings against Citic and five of its former executives including Larry Yung, son of former Chinese Vice President Rong Yiren. The objective is to compensate shareholders who suffered heavy losses after a massive currency bet went sour in 2008. Citic and Yung could also face criminal prosecution.

The timing of the move may look odd, given the state behemoth’s decision to inject all its assets into a Hong Kong-listed vehicle constitutes a major commitment to the city’s capital markets. But the SFC was merely taking its last chance to strike. “Hong Kong has a six-year limit for civil actions,” David Webb, a corporate governance activist, told Bloomberg. “I think basically the SFC ran out of time.”

The case centres on a Citic Pacific regulatory announcement from September 12, 2008 in which shareholders were told that its directors were unaware of adverse material changes in the financial or trading position of the group since 2007. But the writ filed by the SFC, according to the South China Morning Post, alleges that a senior executive had already warned the board that the company’s currency hedge was “out of control”.

On October 20, 2008, Citic Pacific issued a profit warning and reported $1.6 billion in losses from currency trading.

The SFC says investors bought $245 million of Citic Pacific’s shares between the September circular and the October profit warning. The company’s value plunged 55% during those six weeks, and the SFC is now seeking to compensate about 4,500 investors for their losses.

Citic has said that it is taking legal advice. The potential compensation payment is manageable (the conglomerate reported last week it had $755 billion in total assets as of June). But the lawsuit’s outcome could have wider significance. The SFC says the case would “set a precedent for future payout demands linked to trading on misleading information”. That is especially important as class action suits are not allowed in Hong Kong. The territory allows multiparty proceedings but losing parties must pay all or part of their opponents’ legal fees. A few investors tried to take former boss Yung to the Small Claims Tribunal in this particular instance. But were forced to give up after Yung applied to transfer the case to a higher court, where legal costs are much higher.

Citic’s existing management will hope to close the chapter on the current episode quickly and move on. The SFC meanwhile knows a victory will be a landmark event in its fight to protect shareholders’ rights. Policymakers in Beijing may see that as a positive outcome too: encouraging better SOE corporate governance is is a key objective of Citic’s ‘mixed ownership’ reforms, after all.

Speaking of a fresh start, Sinopec’s reform efforts got off to bumpy beginnings when it said on Sunday that 25 investors will acquire a 30% stake in its retail unit for $17.5 billion. The deal has been in the works for months (see WiC251) but investors seem unimpressed by the early details. That’s mostly because Sinopec’s new business partners are almost all Chinese firms and include several state-owned enterprises. That left investors wondering if Beijing is serious about introducing more private sector capital into the state giants. Sinopec’s stock fell nearly 10% this week.

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