Fitch downgrades 4 Chinese national asset managers, warns of more cuts

Investing.com– Fitch said on Thursday it had downgraded the issuer default ratings of four Chinese national asset management companies and flagged more potential downgrades on expectations of weaker government support and headwinds from a property market slump.

The ratings agency downgraded the IDRs of China Cinda Asset Management (HK:) and China Orient Asset Management Co to ‘A-’ from ‘A’, while the ratings of China Huarong Asset Management Co Ltd (HK:) and China Great Wall Asset Management were cut to ‘BBB’ from ‘BBB+’.

Fitch also said that China Cinda’s outlook was maintained at ‘stable’, while the other three asset managers were placed on Rating Watch Negative, which potentially heralds a further downgrade to their IDRs. The ratings agency said it was awaiting financial results for end-2023 to gauge whether there was any further deterioration.

Fitch said the downgrade was driven by increased uncertainty over potential government support for China’s major national asset managers, as well as a change in the criteria under which it viewed their standalone credit profiles.

“The downgrades reflect our view that the government’s propensity to provide timely extraordinary support to the national AMCs has weakened in light of some AMCs’ financial underperformance and capital constraints, and the government’s inconsistent support stance to the sector,” Fitch analysts wrote in a note.

“We believe these dynamics have reduced the AMCs’ ability to effectively perform their policy role of purchasing non-performing assets in the system.”

Property downturn, weak economic recovery drive downgrades

The ratings agency still saw a stable outlook for China Cinda, based on the firm’s stronger financial position in comparison to its peers. But the firm’s three other peers were placed on rating watch negative on the potential for more deterioration in their positions through 2023.

Fitch noted that China’s property market woes, coupled with a laggard economic recovery in 2023 presented more headwinds to the asset managers. While the ratings agency still expects a recovery in their financial positions, the pace of said recovery will be largely contingent on the property sector.

Fitch’s move comes just a few weeks after peer Moody’s put China’s sovereign rating on downgrade watch. But both agencies had affirmed their A+ and A1 ratings on the country in December.

But Moody’s had also raised concerns over China’s property market, which has been in a three-year slump that triggered several high-profile defaults in the sector- namely China Evergrande (HK:) and Country Garden Holdings Company Ltd (HK:). The sector was battered by a mix of restrictive COVID policies, strict capital funding rules and a severe loss of faith among retail home buyers.

Beijing loosened some rules on capital raises in the sector, and also outlined a whitelist of developers eligible for funding support in 2023. But the moves provided little support to the sector, with Chinese house prices and sales continuing to decline through 2023.

Chinese stocks slump after downgrades

The broader Chinese economy also remained weak, as a post-COVID rebound largely failed to materialize over the past year. This in turn weighed heavily on Chinese equity markets, with the bluechip index ranking among the worst-performing major equity indexes in 2023.

The CSI 300 fell 1.4% on Thursday, and was trading just above a five-year low.

The index fell 0.9%, while losses in mainland stocks pulled Hong Kong’s index down 0.5%.

The Chinese government had consistently deployed its national asset managers to snap up non-performing assets in open markets over the past three years, in a bid to shore up sentiment towards the country. But buying activities by state-backed funds have so far yielded little long-term support for local markets.

Upgrade your investing with our groundbreaking, AI-powered InvestingPro+ stock picks. Use coupon INVSPRO2024 to avail a limited time discount on our Pro and Pro+ subscription plans. Click here to know more, and don’t forget to use the discount code when checking out!