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CITIC Limited Annual Report 2014
Risk Management

Treasury Risk Management

Treasury risk management essentially covers the following financial risks inherent in CITIC Limited’s businesses:

  • Interest rate risk
  • Currency risk
  • Counterpart risk
  • Commodity risk

Financial derivatives may be used to assist in the management of the above risks. It is CITIC Limited’s policy not to enter into derivative transactions for speculative purposes. Unless special authorisation is given, the use of derivative instruments is currently restricted by ALCO to interest rate swaps, cross currency swaps, plain vanilla forward foreign exchange contracts, par forward foreign exchange contracts and plain vanilla futures contracts. From a risk management perspective, simple, cost-efficient and HKAS 39 hedge effective instruments are preferred. To the extent possible, gains and losses of the derivatives offset the losses and gains of the assets, liabilities or transactions being hedged.

CITIC Limited is committed to establishing a comprehensive and uniform treasury risk management system. Within the group-wide treasury risk management framework, member companies are required to, according to their respective business characteristics and regulatory requirements, implement suitable treasury risk management strategies and procedures and submit reports on a regular and ad hoc basis, subject to the overall monitoring and guidance of ALCO.

  1. Interest rate risk

    Interest rate risk is managed by considering the portfolio of interest bearing assets and liabilities.

    For our financial subsidiaries, repricing risk and benchmark risk are the main sources of interest rate risk. Observing the principle of prudent risk appetite, they closely tracked changes in the macroeconomic situation and internal business structure, continued to optimise the maturity structure of deposits, made timely adjustments to the loan repricing lifecycle, and took the initiative to manage sensitive gaps in interest rates for the overall objective of achieving steady growth both in net interest income and economic value with a tolerable level of interest rate risk.

    For our head office and non-financial subsidiaries, the interest rate risk arises primarily from debt. Borrowings at variable rates expose CITIC Limited to cash flow interest rate risk, whilst borrowings at fixed rates expose CITIC Limited to fair value interest rate risk. Based on its balance sheet and market conditions, CITIC Limited adopts a flexible approach in choosing financing vehicles at variable and fixed rates and opportunistically employs interest rate swaps to manage interest rate risk.

    Details of interest rate risk management are set out in Note 48(c) to the consolidated financial statements.

  2. Currency risk

    CITIC Limited has major operations in Hong Kong, mainland China and Australia whose functional currencies are Hong Kong dollar (“HKD”), Renminbi (“RMB”) and United States dollar (“USD”) respectively. Our member companies are exposed to currency risk from gaps between financial assets and liabilities, future commercial transactions and net investments in foreign operations that are denominated in a currency that is not the member company’s functional currency. The consolidated financial statement is presented in HKD, which is the presentation currency of CITIC Limited. Translation exposures from the consolidation of subsidiaries whose functional currency is not HKD are not hedged using derivative instruments, as this is not a cash exposure.

    CITIC Limited measures currency risk mainly with foreign currency exposures and seeks to minimise its currency risk by matching its foreign currency denominated assets with corresponding liabilities in the same currency. CITIC Limited uses forward contracts and cross currency swaps where appropriate to manage its currency risk, provided that hedging is only considered for firm commitments and highly probable forecast transactions.

    Details of currency risk management are set out in Note 48(d) to the consolidated financial statements.

  3. Counterparty risk

    CITIC Limited has businesses with various financial institutions, including deposits, interbank lending, financial investment products and derivative financial instruments. To mitigate the risk of non-recovery of funds or financial instrument gains, member companies of CITIC Limited approve and adjust the list of counterparties and credit limits of approved financial institutions through internal credit processes and regularly report to ALCO for carrying out overall monitoring and supervision.

  4. Commodity risk

    Some businesses of CITIC Limited involve the production, procurement and trading of commodities; it has exposure to commodity price risks such as iron ore, crude oil, gas and coal.

    CITIC Limited has entered into long-term supply contracts for certain inputs or used plain vanilla futures contracts for hedging. Whilst CITIC Limited views that naturally offsetting is being achieved to a certain extent across its different business sectors, continual risk management review is being performed to ensure commodity risks are well understood within its business strategies.