CHINA told some trust companies to stop raising money from individuals to fund local government financing vehicles, according to people familiar with the matter, in its latest effort to curb growing financial risks.
The National Financial Regulatory Administration (NFRA) recently banned some lower-rated trust firms from selling wealth products underpinned by LGFVs on concerns of potential defaults, the people said, asking not to be identified as the guidance was private. It’s unclear how many of China’s 67 trust firms received below-par ratings in the watchdog’s latest assessment, the people added.
Chinese regulators face the challenging task of defusing various financial risks that can be interconnected. Trust firms pool money from wealthy clients and invest them in a variety of instruments and projects, offering higher returns than banks, and have been a key funding channel for LGFVs. Both sectors have seen rising risks amid the nation’s prolonged property slump and economic slowdown.
The NFRA did not immediately reply to a request seeking comment.
New trust products for “basic industries,” which are mainly channelled through LGFVs, reached 21.8 billion yuan (S$4 billion) in July. That accounts for about 60 per cent of collective trust products issued for the month, according to data compiled by Use Trust, which tracks the industry. Collective trust products usually target a group of qualified investors.
Cracks have already appeared in the 24 trillion yuan trust fund sector, which has lent extensively to troubled real estate developers. Missed payments from Zhongrong International Trust sparked protests last year, while the industry saw its first bankruptcy in May 2023 when New China Trust folded.
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The NFRA issued new rules late last year to improve regulation of the trust industry, seeking to categorise the firms in a six-level rating system that subjected them to differentiated requirements.
Analysts have also sounded the alarm over the past few years. Of the 55 trust companies that issued financial statements for 2022, 14 reported non-performing and special mention assets that topped one third of their total assets, according to Jason Bedford, a former analyst with Bridgewater Associates and UBS Group. Many of the 13 firms that did not report could also be in trouble, he said.
Meanwhile, the latest move may further curb financing for weaker LGFVs after regulators took a slew of steps to rein in risks from a sector long considered a financial time bomb.
LGFVs saw their largest quarterly financing outflow in the second quarter since Fitch Ratings began to track the data in 2018. Net financing – new yuan bond issuance minus maturities – for the period came in at negative 179 billion yuan, marking the third consecutive quarter of net outflows.
The shrinking of LGFV debt highlights the government’s determination to deleverage local governments, which have been hit hard by sliding land sales. Even so, reducing LGFVs’ debt remains a daunting task. LGFVs’ outstanding bond balance stood at 11.5 trillion yuan as of Jun 30, according to Fitch Ratings. BLOOMBERG
