China faces $800 billion in non-standard debt defaults; Banks struggle with liquidity.

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China is currently facing a staggering $800 billion in defaults in its non-standard debt market. Much of this debt is tied to Local Government Financing Vehicles (LGFVs), which issue fixed-income investments that aren’t publicly traded and are primarily used to fund infrastructure projects. Analysts estimate the size of this non-standard debt market to be massive, and recent data shows an alarming increase in defaults.

In just the first nine months of 2024, 60 non-standard debt products tied to LGFVs have either defaulted or flagged repayment risks—up 20% compared to the same period last year. This surge has set a record for defaults in this debt sector, revealing deep cracks in the foundation of China’s financial system and posing significant risks for the overall economy.

The impact on retail investors has been severe, as many believed these investments were implicitly backed by the state. With defaults piling up, stories of financial loss have multiplied, including that of Ms. Lulu Fang, who lost her life savings due to such defaults. The crisis is spreading financial insecurity among citizens who previously trusted the system.

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On the banking front, Chinese institutions are now struggling with liquidity pressures. Yields on one-year Negotiable Certificates of Deposit (NCDs) have risen sharply, marking the highest levels since June. Rising yields are making it more expensive for banks to borrow, straining their operations.

Banks are also seeing a drop in their deposit base, partly due to a stock market rally that’s redirecting investor funds. Additionally, the slowdown in China’s economic growth has heightened the risk of non-performing loans as businesses and individuals face difficulty meeting loan payments. Recent government regulatory crackdowns, targeting risky and opaque banking practices, have further tightened the financial landscape, leaving banks under mounting strain amid China’s deepening debt crisis.

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