(Editor's Note: An earlier version of this article was published in error. This version supersedes the previous publication.)
Key Takeaways
- China's distressed asset management companies face further impairment losses from large property exposure, which could further hit capital.
- At the same time, the big four will strengthen their support to distressed sectors in addition to their core "bad bank" function.
- Government support will stay very high, in our view, and is the key rating factor.
China's "big four" distressed asset management companies (AMCs) are in a tough position. China Cinda Asset Management Co. Ltd. (BBB+/Stable/A-2), China Orient Asset Management Co. Ltd. (BBB/Stable/A-2), China Citic Financial Asset Management Co. Ltd. (formerly China Huarong AMC, BBB-/Stable/A-3) and China Great Wall Asset Management Co. Ltd. have been asked to strengthen their support to distressed sectors at a time when their capital bases are eroding. That means their credit quality increasingly hinges on government support.
S&P Global Ratings' view is that government support will stay very high, given these national AMCs continue to play an important role in resolving financial system risks. In particular, they have been directed to assist troubled institutions and companies distressed by the property downturn. We expect the AMCs will have ample funding and liquidity and receive help, if needed, to meet capital requirements.
Fundamentals are a different story. The AMCs have been suffering impairment losses due to legacy property exposures. Despite the sizeable provisions made in recent years, impairment losses will likely continue until China's property market recovers. If the real-estate downturn worsens beyond our base case, downgrade risk would pressure these state-owned distressed asset management companies (see "China Property Watch: A Slow, Sequential Recovery In 2024," published on RatingsDirect on Oct. 15, 2023).
Policy Role Is Key To Rating Support
The big four AMCs are an integral part of China's financial stability framework, given their core role in helping the government to resolve risks in the financial system. These four "bad banks," and China Galaxy Asset Management Co. Ltd., a national distressed asset manager started in 2021, together accounted for more than 80% of all nonperforming assets transferred out by commercial banks as of August 2022.
Heightened credit risk in the current economic cycle calls for greater AMC involvement. In addition to this core bad-bank function, AMCs have been asked by the government to strengthen their support to distressed entities, including small and midsized troubled financial institutions, indebted local governments, and ailing property developers. For example, the government guided AMCs to resolve the risk in the property sector. Steps included establishing property relief funds, financing stalled residential home projects, and providing advisory services to bankruptcy restructurings (see table 3 in Appendix).
These additional mandates come at an inconvenient time for the big four AMCs. The sector is trying to clean up legacy problem assets accumulated during their years of rapid expansion. These problem assets include risky investments and subsidiaries that had little synergies with their core business in past years.
Regulators have taken a number of steps to bolster the AMCs at this difficult time, and help them execute their policy roles. For example, in January 2023, the People's Bank of China set up special refinancing loans for national AMCs at up to Chinese renminbi (RMB) 80 billion with an interest rate of 1.75%. The loans supported their participation in restructuring and accelerating risk resolution in the property sector.
In addition, in June 2022, regulators provided extra incentives to commercial banks, insurance companies and other financial institutions to subscribe to AMCs' financial bonds by reducing the required risk weight applied on these instruments. Additionally, in August 2020, the regulator put one more tool, on-shore perpetual bonds, into AMCs' capital-management toolbox to help them manage their capital issuance.
Table 1
| Regulatory revisions are supportive of the AMCs | ||||
|---|---|---|---|---|
| Regulation and issued date | Details and implications | |||
| "Notice regarding addressing the impact of the pandemic and utilizing the functions of financial AMCs in resolving and disposing of risks," issued by CBIRC in August 2020 | (1) For high-risk small and medium financial institutions, the risk weight for the investment and acquisition of nonperforming assets carried out by AMCs can be applied at 50%. (2) AMCs are allowed to apply to the regulator for a phased reduction in the regulatory requirement for provisioning coverage (but not less than 100%). (3) Support is given to AMCs to apply for a pilot issuance of perpetual bonds, while optimizing the approving procedures for issuing financial bonds by AMCs. | |||
| "Guidelines on Guiding AMCs to Focus on Their Main Businesses to Resolve Risk and Reform Small and Medium Financial Institutions," issued by CBIRC in June 2022 | (1) Broadening operational scope by expanding the range of assets that AMCs can acquire, including defaulted bonds, assets over 90 days overdue, and assets with delayed principal and interest payments in the scope of nonperforming asset acquisition. (2) Encouraging AMCs to moderately increase the issuance of financial bonds and providing extra incentives to banks, insurance companies, and other financial institutions to subscribe AMC's financial bonds by reducing the risk weight applied on these instruments. | |||
| "Action plan to improve the balance sheets of high-quality real estate companies," issued by PBOC and CBIRC in January 2023 | PBOC set up special refinancing loans (totaling RMB80 billion, at 1.75%) for national AMCS, supporting their participation in restructuring and accelerating risk mitigation in the property sector. | |||
| AMC--Asset management company. PBOC--People's Bank of China. CBIRC--China Banking and Insurance Regulatory Commission. Sources: PBOC. NAFR (formerly CBIRC). S&P Global Ratings. | ||||
Prolonged Asset Pain Will Stretch Out Earnings Recoveries
We anticipate credit impairments and fair value losses will continue to strain the profitability of the big four AMCs in 2024. These companies ventured outside of their traditional stress asset business and built up large exposure to developers during the property market boom.
Although these AMCs cut their restructured distressed assets by 36% between end-2017 and end-June 2023, the average proportion of restructured distressed assets linked to property sector is still high at 51% as of end-June 2023 (2017: 54%). By our estimates, the big four's return on average assets will gradually recover from 2022 but still be lower than 1%.
Chart 1
Chart 2
Property-related default risk will keep pressure on the asset quality of the AMCs in 2024. We expect an extended "L" shaped recovery for the real estate sector in China.
Government Will Help to Meet Capital Requirements
Continued large impairment losses from significant property exposure has narrowed capitalization headroom against the regulatory requirement for some AMC players (see chart 3). This in turn will also constrain their ability to acquire stressed assets.
The government has demonstrated its ability and willingness to support AMCs in the case of China CITIC Financial AMC. We believe the government will also support other AMCs, if needed.
After China Citic Financial AMC (formerly China Huarong AMC) suffered an RMB106 billion loss in 2020, it received a RMB42 billion capital injection from a group of strategic investors led by Citic Group, a conglomerate wholly owned by the government. Virtually all the strategic investors are central government owned enterprises. In 2022, despite the company's weak performance, it privately placed two rounds of onshore capital instruments: a RMB20 billion perpetual bond and RMB30 billion tier-2 subordinated bond, to boost its regulatory capital base.
China Citic Financial also has recognized unrealized gains from a couple of equity investment transactions, which helped the company to turn a half-year loss into a full-year profit in 2023 and boosted the company's regulatory capital ratio well beyond the minimum requirement of 12.5%. These investments include the acquisition of shares in CITIC Ltd. in November 2023 and conversion of China Everbright Bank's convertible debts in March 2023.
These apparently one-off profitable transactions, in our view, reflect shareholders and the government's efforts to restore China Citic Financial's capital strength. For S&P Global Ratings leverage calculation purposes, we exclude from our capital base the unrealized gains from equity investments in financial institutions.
Chart 3
The Sector's Funding And Liquidity Will Stay Adequate
AMCs generally rely heavily on wholesale fundings such as bank loans and bond issuance in capital markets. Thanks to their strong government background, funding from onshore sources will remain readily available for the big four. The big four AMCs have long established relationships with domestic banks as well as their subsidiaries in Hong Kong. They also have good access to the domestic bond market.
The big four AMCs on average have a large amount of unused credit lines from domestic commercial banks, and that helps to stabilize their funding costs and reduce the impact of capital market volatilities. Domestic banks stood behind Citic Financial even in mid-2021 when it missed its 2020 annual reporting and its offshore debts were under heavy pressure, trading as low as 50 cents on the dollar. These domestic banks provided the company with needed funding and liquidity at a reasonable interest rate.
Chart 4
Downside Risk On Ratings Driven By Stand-Alone Credit Profiles
A very high likelihood of extraordinary government support is one of the factors supporting the stable outlooks on the long-term issuer credit ratings on three rated AMCs. Despite the government support, further deterioration of individual stand-alone credit profiles (SACPs) on the AMCs could lead to a downgrade of the long-term issuer credit rating. This could happen if China's property market falls beyond our base case, leading to further distress in their fundamentals.
Table 2
| Our ratings and view of stand-alone credit profiles for the AMC sector | ||||||||
|---|---|---|---|---|---|---|---|---|
| Company | China Citic Financial (formerly China Huarong) | China Cinda | China Orient | |||||
| Anchor | bb | bb | bb | |||||
| Business Position | Strong (+1) | Strong (+1) | Strong (+1) | |||||
| Capital and Earnings | Weak (-2) | Moderate (0) | Constrained (-1) | |||||
| Risk Position | Constrained (-2) | Moderate (-1) | Moderate (-1) | |||||
| Funding and Liquidity | Adequate/Adequate (0) | Adequate/Adequate (0) | Adequate/Adequate (0) | |||||
| Comparable Rating Analysis | 1 | 0 | 0 | |||||
| Core business SACP | b+ | bb | bb- | |||||
| Group SACP | b+ | bb | bb- | |||||
| Likelihood of government support | Very high (+4) | Very high (+4) | Very high (+4) | |||||
| Issuer credit rating | BBB-/Stable/A-3 | BBB+/Stable/A-2 | BBB/Stable/A-2 | |||||
| Note: We suspended our ratings on China Great Wall in January, 2024. See our Related Research for link to the action. SACP--Stand-alone credit profile. Source: S&P Global Ratings. | ||||||||
Appendix
Table 3
| Examples of the big four AMCs' actions to support China's property sectors since 2022 | ||||||||
|---|---|---|---|---|---|---|---|---|
| AMCs | Developers | Announcement date | Details | |||||
| China Cinda | Kaisa Group | Jul-22 | Together with Shenzhen Huajian to revitalize Kaisa Group’s stalled project in Nansha district, Guangzhou using the "AMC + Huajian's capital investment + agency construction" model. | |||||
| Shimao Group | Oct-22 | Together with Minmetals International Trust to purchase 45% of shareholding of a project in Qixia District, Nanjing for RMB1.75 billion. | ||||||
| Shimao Group | Dec-22 | Jointly established RMB10 billion real estate relief fund with Henan Zhongyu Construction Investment, specifically used to invest in the resolution of troubled real estate in Henan Province. | ||||||
| H-Change Group | Jan-23 | Via the establishment of Wuhu Xinmeng Investment, invested in two projects in Shenzhen through M&A funds with a total subscription scale of RMB8.962 billion. | ||||||
| Zhongnan Construction Group | Feb-23 | Invested RMB2.55 billion in Zhongnan Construction's urban renewal projects in Xinan, Shenzhen. | ||||||
| Hehua Hengrui Real Estate Development | May-23 | Invested RMB4.7 billion in 75 housing projects of Wanliu Academy in Beijing. | ||||||
| Centralcon Real Estate | Jun-23 | Provided financing of RMB4.2 billion to support the completion of the project in Shenzhen. | ||||||
| Wuhu Xinhu Industrial Investment | Jan-24 | Participated in the joint subscription of Wuhu Xinhu Industrial Investment with a total subscription scale of RMB975 million to develop a project in Hainan. | ||||||
| China Citic Financial (formerly China Huarong) | Zhongnan Group | May-22 | Together with other local government-owned entities, signed a framework agreement to support the completion of unfinished projects, project M&A etc. | |||||
| Yango Longking Group | Aug-22 | Signed a framework agreement to help resolve risks. | ||||||
| Macrolink Group | Jul-22 | Signed a restructuring framework agreement to help resolve risk and dispose distressed assets. | ||||||
| Citychamp Darto | Jun-22 | Purchased unmatured bonds from Citychamp Darto. | ||||||
| Yango Group | Aug-22 | Signed bail-out and restructuring agreement. | ||||||
| Sunac | Dec-22 | Together with Citic Trust and six banks, jointly conducted a large-scale financing for Sunac Shanghai Dongjiadu project, with the total financing amount of more than RMB12 billion. | ||||||
| Zhuzhou Huachen | Feb-23 | Together with Citic Urban Development to invest RMB1.2 billion in Zhuzhou, Hunan's projects through mutual benefit bonds. | ||||||
| Kaisa Group | Mar-23 | Together with China Orient to invest in mutual benefit funds to complete the construction of Kunming Kaisa Zengshi Plaza subway. | ||||||
| Wanda Group | Jun-23 | Provided financing for Wuhan Central Cultural District project via M&A funds. | ||||||
| Bluetown Group | Aug-23 | Bailed out project in Zhejiang, using the "AMC + agency construction" model. | ||||||
| Tianjian Rail Transit | Sep-23 | Provided financing of RMB2 billion to revitalize assets of SOEs through equity restructuring and supported the urban renewal in Baodi District in Tianjin. | ||||||
| Sunac China Holdings | Nov-23 | Provided financing of RMB3.48 billion to Shanghai Yalong project. | ||||||
| China Great Wall | Mar-22 | Issued RMB10 billion financial bonds (with coupon rate at 3.30%) to use for property sector risk resolution. | ||||||
| Kaisa Group | Apr-22 | Signed a strategic cooperation agreement with Kaisa Group and China Merchants Shekou. | ||||||
| Evergrande Group | Feb-23 | Together with China Orient and Shenzhen Anji Jianye Investment, provided M&A funds (around RMB17.7 billion) to assist Zhongrong Trust to complete property projects in Shenzhen. | ||||||
| Poly Development Holdings | May-23 | Signed a strategic cooperation agreement. | ||||||
| Jinke | Jun-23 | Great Wall Guofu participated with strategic investors to form investment consortium in Jinke’s shares. | ||||||
| Greentown Group | Jul-23 | Signed a strategic cooperation agreement. | ||||||
| China Orient | Mar-22 | Issued RMB10 billion financial bonds (with coupon rate at 3.15%) to use for property sector risk resolution. | ||||||
| Sunac | Dec-22 | Provided financing of RMB3.311 billion for Wuhan project to repay original debts and support the completion of the project. | ||||||
| CIFI Group | Feb-23 | Signed a strategic cooperation agreement. | ||||||
| Evergrande Group | Feb-23 | Together with Great Wall and Shenzhen Anji Jianye Investment, provided M&A funds (around RMB17.7 billion) to assist Zhongrong Trust to complete property projects in Shenzhen. | ||||||
| Kaisa Group | Mar-23 | Together with China Citic Financial (formerly China Huarong) to invest in mutual benefit funds to complete the construction of Kunming Kaisa Zengshi Plaza subway. | ||||||
| SOE--State-owned enterprise. M&A--Mergers and acquisitions. Sources: Public disclosures and report. S&P Global Ratings. | ||||||||
Related Research
- China Great Wall Asset Management And Subsidiary 'BBB/A-2' Ratings Suspended On Insufficient Information, Jan. 22, 2024
- China Property Watch: A Slow, Sequential Recovery In 2024, Oct. 15, 2023
This report does not constitute a rating action.
| Primary Credit Analyst: | Phyllis Liu, CFA, FRM, Hong Kong +852 2532 8036; phyllis.liu@spglobal.com |
| Secondary Contacts: | Ryan Tsang, CFA, Hong Kong + 852 2533 3532; ryan.tsang@spglobal.com |
| Susan Chu, Hong Kong (852) 2912-3055; susan.chu@spglobal.com | |
| Ming Tan, CFA, Singapore + 65 6216 1095; ming.tan@spglobal.com | |
| Michael Huang, Hong Kong + 852 25333541; michael.huang@spglobal.com | |
| Research Assistant: | Winnie Wang, Taipei |
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