China has unveiled plans to unite three of its state-owned bad debt asset managers with its primary sovereign wealth fund, the China Investment Corp.

What Happened: China’s official Xinhua news agency, cited anonymous sources in saying that China Cinda Asset Management Co Ltd (OTC:CCGDF), China Orient Asset Management and China Great Wall Asset Management are set to come under the control of the China Investment Corp. This strategic move is part of Beijing’s institutional reform agenda, according to a CNBC report on Sunday.

The merger aims to boost the inherent stability of China’s capital markets and restore investor confidence. The news comes in the wake of a recent announcement by China’s securities regulator, stating that the lending of restricted shares would be suspended from Monday.

The decision to unite the asset managers follows a significant drop in the stock market, largely driven by escalating financial risks stemming from a debt crisis in China’s real estate sector. Last week, the central bank made the largest reduction in mandatory cash reserves for banks since 2021 and declared a policy mandate to ease the cash crunch for Chinese developers.

The financial troubles plaguing China’s real estate industry are closely linked to local government finances, as they often rely on land sales to developers for a significant portion of their income.

Why It Matters: The Chinese government’s move to consolidate bad debt asset managers comes amid a series of efforts to stabilize the country’s turbulent stock market. Earlier this month, reports surfaced that China was considering a $278 billion rescue package to tackle the plummeting stock market. This followed a warning from China’s securities regulators to hedge funds to limit short selling in the stock index futures market.

In light of these market upheavals, China’s Premier Li Qiang has been engaging with global business leaders to emphasize China’s stability and potential for high return on investment. However, concerns about China’s economic health persist, with some financial experts warning of a “full banking system collapse” due to the country’s mounting debt.

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