A mainland Chinese credit rating agency has warned over the health of Huarong Asset Management, the state-backed distressed debt manager, which has become the focus of a market sell-off in Asia this week.

China Chengxin Credit said in a statement on Thursday that it was cutting its credit outlook on the company to “negative” because of concerns over its declining profitability and high debt levels.

Huarong, a sprawling conglomerate which was launched as part of a clean-up of the Chinese banking system after the Asian crisis of the late 1990s, has come under market scrutiny since it announced at the end of March that it would delay the release of its 2020 results, alongside expectations of a potential restructuring.

Concerns have centred on a lack of transparency over the quality of its Rmb1.7tn ($260bn) balance sheet, especially assets originated under the leadership of Lai Xiaomin, its former chair who was in January executed for corruption and bigamy. A Chinese court found he had taken Rmb1.8bn in bribes, and said that he had abused the power to allocate credit, alongside other crimes.

Line chart: ts on the US dollar showing Huarong bonds tumble in price

Like other state-backed financial companies, many investors expect the government would step in if Huarong runs into trouble. However, the tumbling prices of its bonds reflects uncertainty over the prospect of that support.

“The difficulty for investors today is the uncertainty as to whether state entities are prepared to help,” said Michel Lowy, chief executive of SC Lowy, an alternative asset manager focused on distressed credit and high-yield debt. “There’s also uncertainty as to what are the offshore assets and what is their value,” he added.

The comments from China Chengxin Credit, which despite its change in outlook retains a triple A rating on the company, come after a series of warnings from international rating agencies over Huarong, which has about $22bn in dollar-denominated debt and counts BlackRock and Goldman Sachs Asset Management among its investors.

Late last Friday, Standard & Poor’s, which has an investment-grade rating for the company, warned over its credit quality given the delay in results. But it added that Huarong was a “government-related entity with a very high likelihood of extraordinary government support”. Moody’s on Tuesday placed its ratings on review for downgrade.

This week, prices of its international bonds plummeted to record lows on fears over the quality of its balance sheet. On Thursday, a $350m bond maturing in 2030 was trading as low as 55 cents on the dollar before recovering slightly to 62 cents.

There are also signs of the company’s woes having some impact across wider credit markets in Asia. The Barclays index covering Asian investment-grade credit outside of Japan has seen spreads over US treasuries this month rise by the most since the global tumult in March last year.

Wei He and Xiaoxi Zhang, economists at Gavekal, said the Chinese government was “walking a fine line”.

“On one hand, they are keen to reduce moral hazard by forcing investors to take a haircut,” they noted. “On the other, they want to prevent any disorderly knock-on effects in the domestic financial system and to limit the damage to confidence in China’s offshore market”.

Additional reporting by Sherry Fei Ju in Beijing