Fitch Downgrades Four Chinese National AMCs by One Notch; Three on Rating Watch Negative

Fitch Ratings has downgraded the Issuer Default Ratings (IDRs) of four Chinese national asset management companies (AMCs) by one notch, reflecting reduced government support expectations.

The IDRs of China Cinda Asset Management Co., Ltd. and China Orient Asset Management Co., Ltd. have been downgraded to 'A-', from 'A', while the IDRs of China Huarong Asset Management Co., Ltd. and China Great Wall Asset Management Co., Ltd. have been downgraded to 'BBB', from 'BBB+'. See the full list of rating actions at the end of this commentary.

The Outlook on China Cinda's IDR is Stable, while the IDRs and Government Support Ratings (GSRs) of the other three AMCs have been placed on Rating Watch Negative (RWN) while we await end-2023 financials to assess any further standalone financial deterioration or reduction in the government's propensity to provide support.

The Shareholder Support Ratings (SSRs) for China Orient Asset Management (International) Holding Limited (China Orient International) and China Great Wall AMC (International) Holdings Company Limited (China Great Wall International) are also on RWN, in line with the RWN on their respective parents' ratings.

Key Rating Drivers

Non-Bank Financial Institutions Criteria Applied: Fitch reassessed government support expectations for the AMC sector in these rating actions by applying the Non-Bank Financial Institutions Rating Criteria. The AMCs' support-driven ratings were previously assessed under our Government-Related Entities Rating Criteria and their standalone credit profiles under the Non-Bank Financial Institutions Rating Criteria, with the latter approach reflecting their business models and for-profit orientation. The change in criteria reflects increasing linkages between the AMCs' standalone credit profiles and policy roles.

Weakened Support Dynamics: The national AMCs' ratings are driven by our expectation of government support from the China sovereign (A+/Stable). 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. We believe these dynamics have reduced the AMCs' ability to effectively perform their policy role of purchasing non-performing assets in the system.

Further Potential Weakening in Government Support: The RWN on China Orient, China Huarong and China Great Wall is in place as we await the issuers' end-2023 financials to determine if there is any additional deterioration in the issuers' standalone credit profiles. This could further reduce the government's propensity to provide support and pressure the issuers' support-driven ratings. We expect to resolve the RWN once the latest financials are available.

The Stable Outlook on China Cinda's rating reflects our expectation that its policy role and significance should be maintained, given its stronger capitalisation and internal profit generation capability relative to peers. We expect China Cinda to take on more policy responsibility to support financial stability while the three other AMCs manage through the downturn, underpinning the likelihood of government support.

GSRs Reflect Meaningful Policy Roles: We have assigned Government Support Ratings (GSRs) of 'a-' to China Cinda and China Orient and 'bbb' to China Huarong and China Great Wall. These indicate the minimum Long-Term IDR level if we do not change our view on the potential for government support.

The GSRs reflect our expectation of extraordinary support from the government to the AMCs in times of need. This is based on the AMCs' significant policy functions, counterbalanced by our belief that the AMCs have a lower support priority relative to other policy institutions and systemically important banks, the latter of which have larger, deposit-funded balance sheets. Our government support expectations also vary between the AMCs based on each issuer's ability to perform its policy function.

Inconsistent Government Support: We believe the government's support stance towards the AMCs has been inconsistent. For example, the significant delays in China Huarong's 2021 capital injection and China Great Wall's 2022 financial report publication suggest that the timeliness of required support or resolution could be adversely affected by the AMCs' ownership structure, role in the system and lengthy government approval processes.

Varied Policy Execution Ability: The four AMCs have varied abilities to execute and fulfill their policy roles, due to different degrees of capital strength. Low capitalisation acts as a constraint on some of the AMCs' policy role execution, as limited headroom against regulatory requirements impedes their ability to undertake policy-driven business, in our view. Unlike many other policy institutions, the AMCs also seek to balance their policy roles with their for-profit orientation, which can constrain their capacity to support projects with limited commercial benefits.

Intrinsic Strength Under Pressure: China's property market slump and economic challenges weigh on the AMCs' asset quality and profitability and pressure internal capital generation. We expect the AMCs' earnings and profitability to eventually recover, but the pace will depend on the property sector, given the AMCs' large direct exposure to the property sector and substantial property collateral. We do not expect a large improvement in the near term, as the weak property sector will continue to weigh on domestic demand through its impact on the construction and household sectors.

Look-Through Approach to Assess Support: We believe the Chinese government would be the ultimate support provider to the AMCs in the event of need. This reflects the AMCs' policy significance and substantial market positions, despite the dilution of the government's direct shareholding in China Huarong following its 2021 restructuring. We believe the government's direct and indirect ownership of the AMCs is long term and strategic and do not foresee large disposals to non-government-controlled entities in the near-term.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade

Weakening of the government's ability to support the AMCs, as indicated by a downgrade in the sovereign rating or a meaningful increase in system leverage.

Weakening of the government's propensity to support the AMCs, either as perceived by Fitch or as evidenced by a material delay or shortfall in capital or liquidity provision to an AMC when needed.

Reduced AMC capitalisation headroom relative to regulatory requirements without credible and achievable plans to replenish the capital, leading to a weakening of the AMC's ability to execute its policy function and, thus, reducing the government's propensity to provide support.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade

Stabilised or meaningfully improved standalone credit profiles, with strengthened capitalisation enhancing the AMCs' ability to carry out their policy functions and increasing their policy significance.

A positive change in the sovereign's rating.

A stronger government support stance, as evidenced by clearer government statements on support for national AMCs or a more timely and sufficient support record.

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

We downgraded the ratings on the debt issued by AMCs' offshore funding vehicle, mirroring the rating actions on their AMC parents. The senior unsecured debt ratings are equalised with the ratings of the AMCs and their overseas subsidiaries, given the debt is guaranteed by these overseas subsidiaries and ranks pari passu with the overseas subsidiaries' other senior obligations.

The rating on senior perpetual bond issued by China Great Wall International Holdings IV Limited and guaranteed by China Great Wall International is notched down once from Great Wall International's rating. This bond ranks pari passu with Great Wall International's other senior obligations, but the one notch difference reflects its higher non-performance risk due to the cumulative coupon deferral feature.

The subordinated perpetual bond issued by Huarong Finance 2019 Co., Ltd. and guaranteed by China Huarong International Holdings Limited is notched down from our internal assessment of China Huarong International's credit profile, reflecting the legally subordinated nature and high non-performance risk from the instrument's coupon deferral feature.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

The ratings assigned to the debt are sensitive to changes in the ratings of the AMC parents.

SUBSIDIARY AND AFFILIATE RATINGS: KEY RATING DRIVERS

We have downgraded the IDRs on the AMCs' overseas subsidiaries, mirroring the rating actions on their respective parent companies. We consider the overseas subsidiaries as core in light of their roles as their parents' sole offshore funding and investment platforms. As a result, we equalise their ratings with their parent companies' ratings.

We have assigned Shareholder Support Ratings (SSRs) of 'a-' to China Cinda (HK) Holdings Company Limited and China Orient Asset Management (International) Holding Limited (China Orient International) and 'bbb' to Great Wall International. These indicate the minimum Long-Term IDR level for these AMCs' overseas subsidiaries if we do not change our view on the potential for shareholder support. The SSRs of China Orient International and Great Wall International have been placed on RWN, mirroring the RWN on their respective AMC parents' ratings.

SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES

The ratings assigned to AMCs' overseas subsidiaries are sensitive to changes in the ratings of the respective AMC parents. Any signs of weakening linkage between the overseas subsidiaries and their respective AMC parents, which may weaken the support assessment, will also lead to negative rating actions.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The national AMCs' ratings are directly linked to China's sovereign rating.

ESG Considerations

China Orient has an ESG Relevance Score of '4' for Management Strategy, due to continued strategic shift to refocus on its core distressed asset management business. Its ability to execute its strategy under capital constraints undermines the company's focus on its policy role. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

China Huarong has an ESG Relevance Score of '4' for Management Strategy, due to its continued strategic shift to refocus on its core distressed asset management business, non-core business divestment, investment and legacy asset management. Its ability to execute its strategy under capital constraints undermines the company's focus on its policy role. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

China Great Wall has an ESG Relevance Score of '4' for Management Strategy, due to its continued strategic shift to refocus on its core distressed asset management business. Its ability to execute its strategy under capital constraints undermines the company's focus on its policy role. This has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors.

We have changed China Huarong's ESG Relevance Score for Governance Structure to '3', from '4', as the ownership structure and associated governance structure have stabilised since its 2021 restructuring and its governance structure complies with regulatory requirement as a publicly listed company on the Hong Kong Stock Exchange. Therefore, we believe the governance structure has a minimal credit impact on China Huarong.

China Great Wall and China Orient have ESG Relevance Scores of '4' for Governance Structure, given both companies have high ownership concentration, with the Ministry of Finance owning over 70% of the shareholding. We also consider the companies' governance structures as weaker, as they are non-publicly listed companies. This has a negative impact on the companies' credit profiles and is relevant to the ratings in conjunction with other factors.

China Cinda, China Huarong and China Orient have ESG Relevance Scores of '4' for Financial Transparency, given the limited transparency of asset quality. This has a negative impact on their credit profiles and is relevant to the ratings in conjunction with other factors.

China Great Wall has an ESG Relevance Score of '5' for Financial Transparency, given its limited transparency of asset quality and prolonged delay in the publication of its 2022 financial report. This has a negative impact on its credit profile and is highly relevant to the ratings in conjunction with other factors.

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/topics/esg/products#esg-relevance-scores.