China AMCs rally on stake transfer
Three of China's central government-owned bad-debt managers have seen their US dollar bonds trade higher on news that their ownership will be transferred to a subsidiary of the country's sovereign wealth fund.
China Cinda Asset Management, China Orient Asset Management and China Great Wall Asset Management announced in separate statements on February 14 that their controlling shareholder, the ministry of finance, plans to transfer all the shares in the firms to Central Huijin Investment, a wholly owned unit of sovereign wealth fund China Investment Corp.
Central Huijin holds the government's stakes in financial institutions including China Development Bank, the big four banks – Agricultural Bank of China, Bank of China, China Construction Bank and Industrial and Commercial Bank of China – as well as several insurance and securities companies. It will also take over a 66.7% stake in margin financing provider China Securities Finance from the MoF.
In response, the spreads on some of the AMCs' dollar bonds tightened by up to 11bp on Monday. Cinda's 4.25% 2025s tightened to 83.7bp over Treasuries from 90.1bp and Orient's 1.875% 2025s traded at 102.7bp from 105.6bp, according to LSEG data. Great Wall's 3.875% 2027s closed at 106.3bp, from 117.4bp on February 14, according to CreditSights. The bonds continued to tighten by a few basis points during the week.
The market viewed the stake transfer as an indication of continued government support, clearing previous concerns after AMCs suffered huge losses from China's real estate sector crisis but did not receive a capital injection from Beijing.
Little change in the companies' business operations is expected, but the confirmation of the government support, improved confidence towards the sector since last year and better sentiment towards Chinese names all contributed to the strong performance of the AMCs bonds.
“In the past month, there’s euphoria around China, DeepSeek and Xi Jingping’s meeting with private entrepreneurs ... The overall risk appetite towards China has become more receptive,” said Mel Siew, a portfolio manager at Muzinich & Co. “Now the market is more comfortable around the support and the underlying credit, and the bonds are less volatile."
Citic Group led the bailout of a fourth state-controlled AMC, China Huarong Asset Management, in 2021. In January last year, Huarong was renamed China Citic Financial Asset Management after buying a 5% stake in Citic Ltd. The stronger ties with Citic and Huarong's several repurchases of its US dollar bonds in 2023 to stabilise its curve boosted market confidence.
As sentiment improved, Cinda, Orient and Great Wall printed US dollar bonds in 2024 with strong investor support despite rating downgrades.
"The downgrade last year ... reflects our view that the timeliness and sufficiency of government support in the form of capital injections to AMCs have been inconsistent and less predictable," said Katie Chen, a senior director at Fitch. She believes AMCs are a lower priority for government support than systemically important banks with larger, deposit-funded balance sheets, and other policy institutions.
Some syndicate bankers expect the three names to return to the dollar bond market later this year, and think the offerings will be well received despite the downgrades. Cinda is rated Baa1/BBB+/A–, Orient Baa2/BBB/BBB+ and Great Wall is rated BBB– by Fitch.
Sector reform
Jenny Zeng, CIO of APAC fixed income at Allianz Global Investors, viewed the stake transfer as a prelude to a "comprehensive structural reform of the financial sector and resource optimisation".
"Going forward, MoF can focus on its regulation and policy making function, while Central Huijin will take the responsibilities for managing the AMCs in accordance with market rules and practices, thereby ensuring better governance and profitability,” she said.
In March 2023, China started a structural overhaul of the financial sector when it created the National Financial Regulatory Administration to replace the China Banking and Insurance Regulatory Commission. Since then, there have been market rumours that the central government will consolidate the sector to create giant players.
Last year, Guotai Junan Securities and Haitong Securities, both of which were partly owned by Shanghai’s state asset management companies, announced a merger which became effective earlier this month. There were also market rumours around a merger of China Galaxy and China International Capital Corp. Despite both companies denying the rumour, Karen Wu, an analyst at CreditSights, said it is "very likely" to happen.
"We are expecting more consolidation, and we can’t rule out the possibility of the consolidation of securities houses under the three AMCs," said Wu.
The government has also tightened the rules on the AMC sector. Last November, the National Financial Regulatory Administration released new guidelines, which include a ban on direct lending to corporates that are current on their debts, a lucrative but risky business.
“AMCs’ profitability will be weaker than at their peak, but the business model will be much safer and less risky. They will be better regulated and better managed with risk under control, which is a positive development for the sector,” said Wu.
Franco Lam, a director at Fitch, expects the AMC sector to see sustained pressure on earnings and asset quality risks because of high property exposure and a slowing economy. He said the impaired loan ratio will remain at an elevated level, and the capital buffer and internal cash generation capability remains weak.