Local govts use of trust products could be problematic

China's regional and local governments have recently increased their use of trust products to secure financing for major projects, but the amounts, while still small, could negatively affect the credit quality of some of the governments, if they continue to rise, Moody's Investors Service said in a report on Monday.

Trust products ultimately add to the regional and local governments' debt burden because they are contractual obligations that require a repayment or "returns on projects". As such, they are akin to debt obligations, the report said.

Additional pressure on regional and local governments' budgets could also emerge in view of the elevated costs, which are related to the short tenors and high coupon rates of these deals.

Moreover, these transactions — which are not recorded as debt — add a further layer of complexity for determining the governments' debt levels, thereby potentially further blurring fiscal transparency, according to the report.