Low-rated trust firms in China are reportedly banned from selling wealth management products for local government financing vehicles.
China’s National Financial Regulatory Administration (NFRA) recently banned some lower rated trust firms from selling wealth management products (WMP) for local government financing vehicles (LGFV) due to concerns of potential defaults, according to a «Bloomberg» report citing unnamed sources.
NFRA issued new rules in late 2023 to classify trust firms into six levels of ratings that subject them to different requirements. Of the 67 firms in the country, it is not known how many received lower ratings.
LGFV Deleveraging
WMPs are a popular choice amongst mainland Chinese investors as they typically yield higher returns than banks with exposure to various instruments and projects. But in recent times, there have been concerns about excessive risks in the 24 trillion yuan ($3.4 billion) trust fund sector which saw the bankruptcy of New China Trust and missed payments by Zhongrong International Trust last year.
Such products can have deep linkages to various parts of the economies with interconnected financial risks and authorities have upped their efforts to deleverage local governments.
According to Fitch Ratings, LGFV posted a 179 billion yuan financing outflow in the second quarter of 2024. This was the third consecutive quarterly decline and the greatest three-month outflow since 2018 when Fitch first started tracking such data.
