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CHINA: LGFV Defaults:  The Trust Products Remain an Issue.

CHINA
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  • In 2023 a wave of issuance was permitted by the Central Government to refinance local government debts (“LGFV”).
  • Some of these debts were packaged up and sold to retail investors as non-standard products called ‘trust products.’
  • It is estimated that in 2023 over US$ equivalent $300bn of new issuance occurred to refinance LGFV debt, with the majority of refinancing occurring in the publicly traded bonds, with the number of trust products refinanced only a portion of the refinanced securities.
  • Data released by the Financial China and Information & Technology Company shows defaults of these Trust products is still occurring and that not only has the problem not gone away, it's getting worse.
  • Defaulting obligations have reached a new high as of September with retail investors now realizing that the implied local government guarantee was only implied.
  • At a time when consumer confidence is at an all time low because of the state of the real estate sector, this is an additional challenge for the government as retail investors who were concerned about real estate invested in 'trust products' instead.
  • As part of the 2024 stimulus program the Central Government is anticipated to allow local government’s to issue as much as CNY6trillion of new bonds .
  • This again will likely see local governments refinance publicly traded bonds.
  • Given the lessons from last time it will be interesting to see policy shifts that could broaden the support for non-standard products, bringing hope to those retail investors hurt by trust products.
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  • In 2023 a wave of issuance was permitted by the Central Government to refinance local government debts (“LGFV”).
  • Some of these debts were packaged up and sold to retail investors as non-standard products called ‘trust products.’
  • It is estimated that in 2023 over US$ equivalent $300bn of new issuance occurred to refinance LGFV debt, with the majority of refinancing occurring in the publicly traded bonds, with the number of trust products refinanced only a portion of the refinanced securities.
  • Data released by the Financial China and Information & Technology Company shows defaults of these Trust products is still occurring and that not only has the problem not gone away, it's getting worse.
  • Defaulting obligations have reached a new high as of September with retail investors now realizing that the implied local government guarantee was only implied.
  • At a time when consumer confidence is at an all time low because of the state of the real estate sector, this is an additional challenge for the government as retail investors who were concerned about real estate invested in 'trust products' instead.
  • As part of the 2024 stimulus program the Central Government is anticipated to allow local government’s to issue as much as CNY6trillion of new bonds .
  • This again will likely see local governments refinance publicly traded bonds.
  • Given the lessons from last time it will be interesting to see policy shifts that could broaden the support for non-standard products, bringing hope to those retail investors hurt by trust products.