China’s distressed asset managers in the spotlight, ‘rescue’ role of troubled state-backed firms questioned amid property woes
- China is seeking to defuse financial risks, with asset management companies expected to help other ailing sectors, particularly property developers
- The firms, though, are already highly leveraged due to bond financing and exposure to the troubled real estate sector
China’s troubled state-backed distressed asset managers have been given the green light to expand their operations, but analysts are increasingly doubtful about their ability to mitigate risks to the nation’s financial system.
Analytics firm S&P Ratings said on Tuesday that it expected China’s four main asset management companies (AMCs) – firms originally set up to isolate and manage bad debt for the nation’s biggest banks – to continue playing a stabilising role amid the property crisis.
“[But] due to significant pressure on their own capital, profitability and asset quality, the rescue role they can play in this economic downturn is limited, and some institutions themselves have become the ones being rescued,” they said.
China’s four main asset management firms – Cinda Asset Management Company, Citic Financial Asset Management, Great Wall and Orient – were set up in the wake of the Asian financial crisis in 1999, taking on 1.4 trillion yuan of non-performing loans from the four biggest state-owned banks.
A fifth national AMC, Galaxy, was formed in 2020 over worries about the coronavirus pandemic triggering a wave of corporate defaults.
Over the last two decades, AMCs had already diversified their operations beyond their initial focus on distressed asset disposal, moving into other activities, including shadow banking and insurance.
And 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 allowed to acquire non-performing assets from large and joint-stock banks, broadening the range of assets they can acquire.
But the years of expansion have left AMCs highly leveraged, primarily through bond financing, and exposed to the troubled real estate sector.
In March, China’s Big Four state-owned banks reported 1.23 trillion (US$171 billion) yuan of non-performing loans in 2023, representing a 10.4 per cent year on year rise.
But while their average combined exposure to the real estate and construction sector last year was only 7 per cent, the four main AMCs’ combined exposure was nearly five times that, at 33 per cent, according to S&P, because they are dealing with bad assets related to property.
[The move] reflects increasing risks to China’s public finance outlook as the country contends with more uncertain economic prospects
S&P cautioned that earnings quality at some AMCs was poor, flagging Citic Financial Asset Management’s finances as “unsustainable” due to an overreliance on non-operating income, or income derived from activities outside its core distressed asset business.
S&P’s assessment comes after two ratings agencies – Fitch Ratings and Moody’s Ratings – downgraded ratings for the four main AMCs in January, citing concerns over waning government support amid the ongoing property downturn.
“[The move] reflects increasing risks to China’s public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliance growth to what the government views as a more sustainable growth model,” Fitch said in a statement.
A “rating watch negative” outlook for the other three main asset managers indicates a greater chance of the outlook being lowered further, according to Fitch’s ratings system.
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S&P also pointed to the asset managers’ poor take-up of support measures, including a 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 (US$22.3 billion) scheme to funnel support to beleaguered real estate developers via AMCs, with 80 billion yuan provided by the central bank.
But as of the first quarter of 2024, only 20.9 billion yuan in loans had been issued, according to official data.
In addition, due to “severe pressure” on their own asset quality and capital, AMCs could be reluctant to take on more real estate bailout projects, according to S&P.
Analysts, though, remained confident that AMCs’ overall importance, plus their long-standing relationship with the central government, meant Beijing would step in if needed.
S&P said it expected Beijing to support capital injections for firms that are badly undercapitalised, adding that their financing remained stable and that they do not anticipate liquidity tightening in the next year.
