Record Defaults Hit $800-B Chinese Local Debt Market

Defaults in an opaque corner of China’s local debt market have surged to a record high, ensnaring investors who believed the securities had an implicit guarantee from the state, Bloomberg News reported.

In the first nine months of this year, 60 non-standard products tied to local government financing vehicles (LGFVs) have defaulted or flagged repayment risks. I Photo: Windmemories Wikimedia Commons

It wasn’t supposed to be this way.

Last year, faced with a wave of bad debt from municipalities’ financing arms, the central government took action, allowing local governments to raise around 2.2 trillion yuan ($309 billion) in new bonds to help repay creditors and directing state banks to provide refinancing support.

These measures lowered borrowing costs to record lows, enticing investors back into the market. However, one segment remained troubled.

Failures of non-standard products—fixed-income investments that aren’t publicly traded—surged to unprecedented levels. While there’s no official size for the sector, analysts estimate it to be worth around $800 billion.

In the first nine months of this year, 60 non-standard products tied to local government financing vehicles (LGFVs) have defaulted or flagged repayment risks—up 20% from the same period last year, according to Financial China Information & Technology Co.

The still relatively small but growing number marks a record in data going back to 2019, costing many retail investors.