Hong Kong and mainland companies may not have dabbled much in the SIVs, CDOs and MBSs which have undone so many US and European financial institutions. But as the HK$15.5 billion loss admitted by Citic Pacific on Monday and the subsequent 55.1 per cent fall in the company's stock price demonstrate, spreading cross-asset contagion means that local companies with complacent managers are as much at risk in this crisis as anyone else (see the first chart below). In the Asian crisis of 1997, financial contagion spread across borders. This time around, it is spreading across asset classes as well. We saw that right from the start of the credit crunch, as geared investors switched out of the mortgage-backed securities market and into commodities, driving prices sharply higher. The shift helped push up commodity currencies such as the Australian dollar, which, because of its high interest rate, was already widely held by leveraged investors as the long leg of their carry trades. From just 75 US cents two years ago, the currency soared very close to parity with the US dollar in July. It couldn't last. As financial markets went into deleveraging mode this summer, geared investors were forced to cut their positions. Commodity prices tumbled, and so did the Australian dollar, falling 30 per cent in just three months. The aussie's volatility has caused big problems for Chinese companies such as Citic Pacific that have invested heavily in Australian mines. As the currency rose, they watched the capacity-boosting capital expenditure they had planned becoming much more expensive in yuan terms. Not surprisingly, they tried to hedge their currency exposure by buying Australian dollar forwards. If things had stopped there, Citic would have been all right. But they didn't. Senior executives were asleep at the wheel, and the company suffered a nasty crash. It's a story as old as the hills. A poorly supervised corporate treasurer or finance director begins buying simple derivatives to hedge his company's exposure to currency or commodity price movements. He or she gets lucky, and the hedges make money. 'This is easy,' he thinks, crediting his success to superior trading ability. Soon he begins to reason that by gearing up and putting in place bigger and bigger positions, he could turn the corporate treasury into a profit centre and do his own career a power of good. He develops a taste for even more leverage and ever more complex financial instruments, and before long he has turned the corporate treasury into a hedge fund, only one where the chief investment officer has no trading experience and no effective risk management. When markets turn, he gets wiped out, inflicting massive losses on his unsuspecting employers. It's a story Citic should have taken to heart long ago. In 1994, the company's mainland parent lost at least US$40 million through unauthorised speculation in copper futures on the London Metal Exchange. But Citic failed to learn the lesson that strict management supervision of all trading activities is essential. As a result, it now faces having to take delivery of A$9 billion bought at 87 US cents to the Australian dollar. With the market rate at about 70 US cents, that equates to realised and mark-to-market losses of HK$15.5 billion. Unable to close out its positions, Citic will lose more if the Australian dollar sinks further. That's tough on Citic shareholders, but shareholders in other Hong Kong-listed companies should be nervous too. The rapid expansion of mainland companies into new markets over recent years has fostered a culture of risk-taking, while risk management procedures have failed to keep pace. It is likely other companies have similar exposures, which will also have been wiped out in recent months. Expect more cross-asset contagion as other losses come to light.