(Bloomberg) -- 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.
Most Read from Bloomberg
It wasn’t supposed to be this way. Last year, confronted with a wave of bad debt issued by municipalities’ financing arms, the country’s central government took action. It gave local governments permission to raise around 2.2 trillion yuan ($309 billion) in new bonds to help repay creditors and ordered state banks to provide additional refinancing support.
Those measures drove borrowing costs to a record low and investors rushed back into the market, clamoring to buy bonds and loans. But one segment didn’t get fixed. Failures of so-called non-standard products, which are fixed-income investments that aren’t publicly traded, surged to record levels.
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.
The defaults have proved costly for many retail investors.
Take Lulu Fang. The 60-year-old owner of a small trading company said she lost her life savings of 15 million yuan when she bought so-called trust products tied to Guizhou province in the southwest of the country. She was counting on a stable return of about 8%, much higher than what she would earn from depositing the funds in a bank. Instead her investment was wiped out when the products defaulted last year.
Faced with possible foreclosure on her apartment in Shenzhen due to her failure to make mortgage payments, she joined more than 100 other investors on multiple trips to the trusts and government offices to plead for repayment.
“My life is a total mess now,” she said. “I have worked my entire life and put all the money I saved for retirement into the products. I was told these were safe. That was a lie.”
The country’s towns, cities and provinces have used so-called local government financing vehicles (LGFVs) 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.