When a state-backed conglomerate starts acting like a hedge fund, no one should be surprised when things end messily. Citic Pacific has blown itself up with some cowboy-style trading on the foreign exchange markets. The steel-to-property conglomerate had leveraged foreign exchange contracts for A$9.4bn, even though its capital expenditure and operating expenses through 2010 amounted to just A$1.6bn. When the Aussie dollar tumbled, the hedges morphed into a potential US$2bn loss.

Every hedge fund must wish it had a sugar daddy such as Citic Group, the Chinese state-owned company that owns 29 per cent of Hong Kong-based Citic Pacific. It came to the rescue with a $1.5bn loan facility but failed to stop Citic Pacific’s share price halving. With potential losses on the unauthorised trades almost treble forecast earnings, the scandal is a comedown for chairman Larry Yung, China’s first “red tycoon”.