China Huarong Asset Management Co. Ltd. And China Huarong International Holdings Ltd.

The negative outlook reflects our view that China Huarong's leverage is still under pressure because of its weak earnings recovery and reduced regulatory barriers to entry for the distressed asset management sector. We could lower the rating on China Huarong by one notch if: The group fails to limit the financial leverage of its nonbank business to 12x over the next 12 months. This could be caused by a weak earnings recovery, impairing its internal capital generation capabilities; or Further easing of regulatory barriers to entry and removal of regulatory limitations on regional distressed asset managers and new players, such that competition further intensifies, China Huarong's profit margin declines, and its market share shrinks. We could also downgrade China Huarong

...Extraordinary level of government support a strength. We expect China Huarong Asset Management Co. Ltd. (China Huarong) will maintain its very important role as a financial system stabilizer in China. That includes acquiring and managing nonperforming assets (NPAs) from financial institutions and distressed companies. We also believe China's Ministry of Finance (MOF) will remain the ultimate controlling shareholder of the company, though CITIC Group will become the new largest shareholder after MOF transferred its 3% stake in China Huarong to CITIC Group. Financial leverage remains constrained. We forecast China Huarong's financial leverage for its nonbank segment will remain constrained over the next two years, at slightly below the threshold of 12x. Our assessment considers the company's Chinese renminbi (RMB) 42 billion recapitalization at the end of 2021, as well as the disposal of its noncore financial subsidiaries over the next two years. Asset-quality pressures continue. China Huarong's...

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