(Bloomberg) -- Four Chinese bad-debt managers were downgraded by Fitch Ratings Inc. on concern over their financial situation and expectations of reduced government support.

The issuer default ratings of China Cinda Asset Management Co. and China Orient Asset Management Co. were lowered to A- from A, Fitch said in a release Thursday. China Huarong Asset Management Co. and China Great Wall Asset Management Co. were cut to BBB from BBB+, it said. 

The firms’ ability to buy non-performing assets has been hampered by their financial underperformance, capital constraints, as well as the government’s inconsistent support, the statement said.

“Fitch’s across-the-board downgrade of the AMCs should not come as a huge surprise given the persistent weakness in China’s property sector and its economy more broadly, leading to continued weak underlying fundamentals at the AMCs,” said Nicholas Yap, head of Asia credit desk analysts at Nomura Holdings Inc. The ratings are still well within investment grade territory, he added.

The outlook on China Cinda is stable, while the other three have been placed on Rating Watch Negative ahead of their 2023 financial results, Fitch said. In December, the rating agency said it has a neutral outlook on China’s economy, while flagging persistent risks including property sector woes and forecasting a slowdown in growth next year. 

Moody’s Investors Service a month ago put China Cinda and China Orient on review for a downgrade after cutting its outlook on Chinese sovereign bonds. 

Bad loans at the nation’s commercial banks rose to a record 3.2 trillion yuan ($447 billion) at end-September, according to official data, as a protracted economic downturn and property crisis weighed on businesses. 

Soured loans could increase further as banks were asked by authorities to provide funding support to distressed developers, as well as roll over local government debt at favorable terms to avert a crisis in that $9 trillion market.

China’s four bad-debt managers were created in the aftermath of the Asian financial crisis, when decades of government-directed lending to state companies had left the country’s biggest banks on the brink of insolvency. The bad-debt firms went on to expand beyond their original mandate, creating a labyrinth of subsidiaries to engage in other financial businesses and borrow billions from the bond market. 

Huarong was the most aggressive of the four under former Chairman Lai Xiaomin, who was executed three years ago for crimes including bribery. State-run financial conglomerate Citic Group led a $6.6 billion government-orchestrated bailout of Huarong in 2021.

Huarong Sends $1.7 Billion Back to Citic After Asset Sales 

“Huarong will continue to benefit from its deeper integration with Citic Group,” Yap said. 

While China’s bad-debt managers are unlikely to be affected by Fitch’s downgrade, the prolonged slump in the property market will continue to weigh on the sector, said Owen Gallimore, head of Asia-Pacific credit analysis at Deutsche Bank AG.

Supportive measures by the government have failed to arrest a slump in the housing market. The value of new home sales among the 100 biggest real estate companies plunged about 35% in December from a year earlier, faster than November’s decline. For the year, sales were down 17%.

There’s also concern over China’s local government financing vehicles, which need to pay back a record amount of maturing local bonds this year.

LGFVs spent years accumulating off-balance sheet debt as they funded massive stimulus programs reliant on infrastructure investment — a growth model that’s become unsustainable as local government finances have worsened. That’s made investors nervous about how much officials can back LGFV debt.

China’s LGFVs Must Repay a Record $651 Billion of Bonds in 2024

“Fitch’s rating action won’t have material impacts on these bad debt managers’ credits and government support for the sector is clear and proven,” said Gallimore. “However, the rating agency’s comments likely reflect the broader concerns regarding the property and LGFV sectors. December property sales extended the run in dramatically lower property transactions to six months with no signs of a tangible recovery.”

(Updates with property market data, quote in last five paragraphs.)

©2024 Bloomberg L.P.