Defaults in an opaque corner of China’s local debt market have surged to a record high, ensnaring investors who’d assumed the securities had an implicit guarantee from the state.
While there is no official tally of the size of the sector, analysts estimate it to be around $800 billion. In the first nine months of this year, 60 non-standard products tied to LGFVs have defaulted or warned of repayment risks, up 20% from the same period last year, according to Financial China Information & Technology Co., a data provider. The still relatively small but growing figure was a record in data going back to 2019.Take Lulu Fang.
The country’s towns, cities and provinces have used so-called local government financing vehicles to fund infrastructure projects, including road and ports. However, projects financed by the LGFVs don’t necessarily earn money. That makes them dependent upon support from the government. “Although China has introduced a series of policies to address LGFV debts, the policies need to ensure the repayment of LGFVs’ public bonds as they are part of the capital market,” said Laura Li, a managing director at S&P Global Ratings. “Should they default, it will endanger financial stability and social stability.”
Many of the defaults have occurred in the trust industry. Trust fund products are usually unlisted and sold via channels such as banks and securities firms to companies, financial institutions and high net worth individuals with a minimum investment threshold of 1 million yuan. They usually offer regular fixed payments annually or semi-annually with a set period of six months to five years.