Oct. 21 (Bloomberg) -- Citic Pacific Ltd. tumbled the most in 18 years in Hong Kong trading after predicting HK$15.5 billion ($2 billion) in losses from unauthorized currency bets.

The unit of China's biggest state-owned investment company dropped 55 percent to close at HK$6.52. The company ousted Financial Director Leslie Chang, 54, and Financial Controller Chau Chi Yin, 52, and said yesterday in a filing its parent would help to arrange a $1.5 billion loan.

``The company may face bankruptcy if it doesn't secure the loan from its parent as banks probably won't dare to lend money to it under the current credit crunch,'' said Liu Yang, managing director at Atlantis Investment Management Ltd., which oversees about $2 billion in China assets. ``The incident shows the company has real problems in risk management.''

Citic Pacific's bet that the Australian dollar would rise incurred losses as the currency tumbled about 30 percent against its U.S. counterpart from a 25-year high reached in July. The loss would exceed by almost four times the $550 million cost of China Aviation Oil (Singapore) Corp.'s wrong-way bets on jet- fuel prices in 2004.

The drop in the stock, the most since 1990, cut Citic Pacific's market value to HK$14.3 billion and takes its decline this year to 85 percent. Today's slump reduced the value of Chairman Larry Yung's 19 percent stake by HK$3.3 billion. Yung, 65, was ranked China's fifth-wealthiest person with $3.7 billion, Hurun Inc., a Shanghai-based research company, said Oct 7.

Banking Support

Yung will head to Beijing tomorrow and the $1.5 billion loan arranged by Citic Pacific's parent ``won't take too long,'' Managing Director Henry Fan, 60, said today in an interview over the phone in Hong Kong. The company has HK$9 billion in cash and loan facilities, he said.

``All our relationship banks said they will support us and our operations are normal,'' Fan said. Frances Yung, 36, the daughter of the chairman and head of finance department, has been transferred out and will face disciplinary action, Fan said.

The losses occurred after Finance Director Chang conducted the transactions without following hedging policy and seeking Chairman Yung's approval. Chau failed to perform checks on Chang, the company said yesterday. Chang and Chau couldn't be reached for immediate comments.

Ratings Cut

Moody's Investors Service today downgraded its rating for Citic Pacific to Ba2 from Ba1 and said the recommendation is on review for further cuts. Goldman Sachs Group Inc., JPMorgan Chase & Co. and Citigroup Inc. also cut their ratings on Citic Pacific shares to ``sell'' or ``underperform.'' They also reduced their target prices.

Citic Pacific, which makes steel and develops property, bought the currency contracts to fund an A$1.6 billion ($1.1 billion) iron ore mine in Australia, it said yesterday.

A loss of HK$808 million has been incurred from terminating some leveraged currency contracts, and there may be an additional HK$14.7 billion in losses, Citic Pacific said yesterday.

The losses are based on an exchange rate of 70 cents to the Australian dollar, $1.35 to the euro and 6.84 yuan to the dollar, it said. The outstanding Australian contracts have a weighted average strike price of 87 U.S. cents to the Australian dollar, it said.

Australian Dollar

The Australian dollar traded at 68.85 U.S. cents at 5:33 p.m. in Hong Kong. A strike price is the price at which the owner of an option can buy or sell the underlying security, commodity or currency.

Citic Pacific would receive a maximum A$9.44 billion under the outstanding forward contracts, almost six times the estimated A$1.6 billion capital expenditure needed for the iron ore project by 2010, according to yesterday's statement.

The ``cowboy hedging policy sees Citic sitting on unlimited potential losses,'' Anil Daswani, a Hong Kong-based analyst at Citigroup, said in a report.

The company didn't say which banks sold the currency contracts. Yesterday it said it knew of the exposure last month.

Shareholder activist David Webb criticized Citic Pacific for failing to disclose the losses earlier. The company's shares fell 42 percent between Sept. 7, when the board learned of the exposure, and yesterday. The Hang Seng Index declined 23 percent in the same period.

`Strange Bet'

``They should have disclosed any price-sensitive information right away,'' Webb, a former independent director at the city's bourse, said today. ``They had limited upside and unlimited downside. It sounds like a very strange bet to accept.''

The currency loss is more than three times Citic Pacific's first-half profit of HK$4.38 billion.

Finance executives Chang and Chau ``didn't look too deeply into the contracts, and didn't understand the potential downside risks,'' Managing Director Fan said today. ``They didn't consider and evaluate the risks properly.''

Hong Kong Exchanges & Clearing Ltd., which runs the city's stock markets, doesn't comment on individual cases, Henry Law, a spokesman said.

``The companies involved might need time to understand the impact as well as the cause of the events,'' Law said in response to a question on how the exchange assesses whether companies have informed investors in a timely manner. ``It depends on a case-by-case basis.''

Yung, born 1942 in China, is the son of former Chinese Vice President Rong Yiren. Rong was dubbed the ``red capitalist,'' after staying in China and handing over his fortune to the new government when the Communists won power in 1949. Rong, who helped pioneer China's moves toward a market economy, set up Citic Group in the 1970s as a vehicle for foreign investment.

To contact the reporter on this story: Theresa Tang in Hong Kong at ttang3@bloomberg.net

Last Updated: October 21, 2008 07:28 EDT