China’s distressed asset managers in spotlight, ‘rescue’ role of distressed state-backed firms questioned amid property woes

China’s four major asset management companies – Cinda Asset Management Company, Citic Financial Asset Management, Great Wall and Orient – were established in the wake of the 1999 Asian financial crisis, taking out 1.4 trillion yuan worth of non-performing loans from the four largest state-owned banks. .

AMC’s fifth domestic company, Galaxy, was formed in 2020 amid concerns that the coronavirus pandemic would trigger a wave of corporate insolvencies.

Over the last two decades, AMCs have already diversified their activities beyond their initial focus on the disposal of non-performing assets and into other activities, including shadow banking and insurance.

Earlier this month, it was reported that the National Financial Regulatory Administration had issued a notice in April that the four major AMCs would also be able to acquire non-performing assets from large banks and joint-stock banks, expanding the range of assets they can acquire.

But years of expansion have left AMCs highly leveraged, largely through bond financing, and exposed to the troubled real estate sector.

In March, China’s Big Four state-owned banks reported 1.23 trillion ($171 billion) in non-performing loans in 2023, up 10.4% year-on-year.

But while their average combined exposure to the real estate and construction sector last year was just 7 percent, the combined exposure of the four major AMCs was almost five times that, at 33 percent, according to S&P, because they deal with bad property assets.

S&P cautioned that the earnings quality of some AMCs is poor, labeling Citic Financial Asset Management’s finances as “unsustainable” due to its overreliance on non-operating income, or income derived from activities beyond its core distressed asset business.

S&P’s rating comes after two ratings agencies – Fitch Ratings and Moody’s Ratings – downgraded four major AMCs in January, citing concerns about declining government support amid the ongoing real estate downturn.

“(The move) reflects increasing risks to China’s fiscal outlook as the country grapples with an increasingly uncertain economic outlook as it shifts away from property-led growth to what the government considers a more sustainable growth model,” Fitch said in a statement.

According to Fitch’s rating system, the negative rating outlook for the remaining three major asset managers indicates a greater likelihood of further downgrades in the outlook.

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S&P also noted the poor uptake of support measures by asset managers, including the special refinancing loan introduced by the People’s Bank of China in January last year.

The PBOC said it would launch a 160 billion yuan ($22.3 billion) program to channel support to distressed developers through the AMC, with 80 billion yuan provided by the central bank.

However, according to official data, only 20.9 billion yuan worth of loans were granted in the first quarter of 2024.

Moreover, according to S&P, due to “serious pressures” on the quality of their own assets and capital, AMC companies may be reluctant to undertake more real estate rescue projects.

But analysts believed that AMC’s overall importance and their long-standing relationship with the central government meant Beijing would step in if needed.

S&P said it expects Beijing to support capital injections for companies that are heavily undercapitalized, adding that their financing remains stable and that it does not expect a liquidity tightening next year.