Time to restore the good name of Citic Pacific
The financial crisis has ruined many once-stellar reputations around the world. Hong Kong is no different. The resignation of Larry Yung Chi-kin as head of Citic Pacific has ended one of the city's great business fairy tales. But it is not only about the decline in fortunes of a single man or that of his close associate and one-time political star, Henry Fan Hung-ling. Their joint resignations were triggered by Citic's mammoth loss in high-risk currency bets, its delay in disclosing the bad bets and the subsequent investigations by regulators and the police. These events raise troubling questions about corporate governance. There is a need for the premier Beijing-backed conglomerate to overhaul its management and regain public confidence.
In this context, the shock resignations this week were necessary - and overdue. Even now, Citic has never adequately explained the currency-hedging debacle that led to a staggering HK$14.63 billion in losses, first disclosed in October. It claimed those trades were unauthorised and carried out by two former senior finance executives, but they involved no elements of fraud or criminal activity. Mr Yung's daughter, Frances Yung Ming-fong, headed the group finance department at the time. She has since been demoted but remains with the company. Her elder brother, Carl, has also stayed on as a top executive.
Six weeks of official silence followed the discovery of those losses; this hardly met Hong Kong's regulatory requirement for prompt disclosure. Worse, more than a week after the discovery was made, Citic directors issued a public statement claiming they were unaware of any adverse financial or trading position that would require disclosure. This sequence of events showed the top management was being either deceitful or incompetent. Either possibility would warrant the resignation of Mr Yung and Mr Fan. Investigators may yet get to the bottom of what really happened. But whatever the investigative outcome, Mr Yung's replacement, Chang Zhenming, owes shareholders and the public a full explanation.
As one of the original red capitalists, Mr Yung has long been one of the country's richest men. His father was the late state vice-president Rong Yiren, who founded Citic Group, the mainland parent of Citic Pacific. With help from Mr Fan, the son founded the Hong Kong-listed entity in the 1980s as one of the pioneering 'window companies'. These were Beijing-financed companies that served as middlemen to access foreign capital and investments at a time when the mainland economy was still closed and opaque. It went on to amass significant stakes in strategic assets owned by the British hongs, such as Cathay Pacific, CLP Power and Hongkong Telecom, the predecessor of PCCW. This led to speculation that Beijing was intent on asserting commercial control before the handover. In the process, Mr Yung built one of the city's great conglomerates and installed close family members in key positions. Citic also owns significant stakes in two of the cross-harbour tunnels.
The company has outgrown its role as a window company, but it remains an unwieldy conglomerate run as a family enterprise. Most state-owned companies today have no difficulty accessing overseas capital markets and attracting foreign investments. Most are much more focused on a single line of business. Many have tightened corporate governance to guard against excessive family ties, political connections and the potential conflicts of interest they engender. Citic needs to follow such examples. The latest resignations are just the first step towards restoring public confidence.
