The Six New Measures Pan Gongsheng Threw Out at Lujiazui Are Not Reform at All — They Are the CCP Central Bank's All-Out Defense, Backed Into a Corner. This Episode Exposes How the Interest Rate Corridor Welds the Bond Market Shut, Which Three Real Pathologies the Three-Layer Defense Net Misses, and Uses 1990s Japan as a Mirror to Tell You Whether This Is a Dead End

This article provides an in-depth analysis of the six new financial policies introduced by Pan Gongsheng, Governor of the People's Bank of China (PBOC), at the Lujiazui Forum, pointing out that these are not reforms but a comprehensive defensive posture forced upon them. By deconstructing the interest rate corridor, the three-tier defense network, and comparing them with Japan's long-term deflation in the 1990s and the European Central Bank's policies, the article reveals the deep-seated crises currently facing China, including bank net interest margins falling below the survival threshold, the drying up of credit to the real economy, hidden bad debt risks, and financial involution.

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Observe things as they are, and reject fragmented cognition. Today, we are discussing something very important. At the Lujiazui Financial Forum on June 17th, that guy Pan Gongsheng threw out six new tools in one go. Hey, I'll explain what these six things actually are in a moment. And as usual, the CCP's narrative is fucking shameless, talking about high-quality development and high-level opening up. If you try to understand it according to the CCP's narrative, you'll definitely be led into a ditch. Now, we need to clarify and understand one thing: these six items are actually a defensive posture forced upon them because they've been backed into a corner. I will use several identical historical cases as a mirror for everyone to look at. Now, back to the main topic. Let's look at the most important of these so-called six new policies: the interest rate corridor. What can we see from this? From this, we can see exactly what the CCP is trying to defend against. This is the one with the greatest liquidity lethality among the six tools. What is China doing now? It's called compressing short-end interest rates.

To translate the interest rate corridor into plain language for you: the CCP is actually copying the Federal Reserve's interest rate corridor system, that is, the federal funds rate. This thing is essentially the PBOC drawing an upper and lower limit for the price of overnight funds in the interbank market, and the range in between is called the interest rate corridor. Previously, this range was about 70 basis points wide; now, the CCP's central bank has slashed it to 50 basis points. For example, the current 7-day reverse repo rate is 1.4%, which is the pivot, with 25 basis points above and below, effectively boxing the price of funds into a very, very narrow corridor between 1.15% and 1.65%. Let's continue. The interest rate corridor has narrowed from 70 basis points to 50 basis points, while DR001 has long been lower than the policy rate. This brings us to a point: what is this thing? This is the bread and butter of the interbank market.

This thing is called the capital scissors spread. On one side, you have the risk-free rate between banks, known in the industry as DR01. On the other side, you include non-bank financial institutions, whose interest rates are slightly higher than those of commercial banks. This is a market rate that carries a credit premium. What do these non-bank institutions include? Things like bullshit wealth management products, brokerage asset management, various funds, and insurance. So, what is the traditional play for these non-bank institutions? They take bonds, use them as collateral at major banks to borrow cheap short-term money, and then engage in maturity mismatching. What is the purpose of this mismatching? To buy longer-duration assets, like local government bonds with five, eight, or ten-year terms, to earn the spread on both duration and credit. Now, what the People's Bank of China (PBOC) is doing is essentially crushing the volatility at the short end, effectively wiping out the volatility these people rely on to make money with a single stroke. For instance, if the price of capital is about to drop, everyone starts betting that the central bank is going to release liquidity. At this point, the PBOC immediately uses reverse repos to suck the money back out. If interest rates spike—like when capital is tight across quarters—just as the rates are about to jump, the central bank intervenes between 3:00 PM and 3:30 PM, which is the window for these non-bank institutions to close their positions. The CCP's central bank uses reverse repos to flatten these interest rate spikes, effectively welding both ends shut. What does this add up to? It means the price discovery function of the bond market is basically dead. The yield on long-duration government bonds no longer reflects the true return on capital. What is it then? It's just an appendage of the CCP central bank's balance sheet. Let's look at what the CCP is doing. Over the past twelve months, the DR01 rate has been stuck below the 1.4% policy rate since June 2025, and in April and May of this year, it even sank another 10 basis points. What does this mean? It means the market rate is not in the corridor at all, and this rate has been long-term below the corridor. So what does the CCP central bank want to do now? It is desperately trying to suck liquidity back out, trying to push the interest rate back up. That's why you saw frequent net withdrawal actions by the central bank in March and April of this year. By June 2nd of this month, the single-day open market operation scale hit a record low of just 200 million yuan. This is a market where the interest rate is already lower than the policy rate, and the central bank has to pay interest to drag it up. So what kind of interest rate market is this? It's a market where the interest rate is already lower than the policy rate, and the central bank has to pay interest to drag it up. So what is the CCP actually doing? This isn't anchoring interest rates, brothers; this is the credit demand itself collapsing. This is typical easing during a recession. Where is the biggest risk? The PBOC actually spelled it out in its own risk list. It listed cross-border capital outflows as the most feared and lethal flashpoint, and it also admitted that the controllability of this channel is extremely low, completely exceeding the coverage radius of a single central bank. I can't help but want to ask Pan Gongsheng one question: for a channel you basically can't control, can you really weld it shut by raising the lower limit of the corridor by 10 basis points? You can't weld it shut at all. So my judgment is that this narrowing of the interest rate corridor is indeed doing two things at once, but the weight of them is vastly different. First, what Pan Gongsheng wants to do is this very weak exchange rate defense mechanism. But this thing can't be defended at all. Why? Because real credit demand is collapsing. What Pan Gongsheng is doing is more like the patient's EKG has already flatlined, and this idiot runs over to turn down the alarm sound on the monitor, but it doesn't change the fact that the person is already dead. Right now, whether it's companies or ordinary people, everyone is desperately paying off debts to repair their balance sheets. You, Pan

Pan Gongsheng could cut this interest rate down to the floor and it still wouldn't work, because absolutely nobody wants to borrow money. This is that same old script from Japan in the 1990s where interest rates hit zero, yet it still couldn't stop a decade of deflation. If over the next few months this DR001 continues to hug the policy interest rate and net interest margins keep falling, then we can basically conclude that loan demand has completely collapsed. Alright, the first and most important tool is covered. Now, if we look at these six tools together, you'll find they aren't six isolated parts at all. What are they? They are a layered, tightly interlocking defensive network. I've divided it into three layers. The first layer is the internal defense line, which manages internal leverage to make sure it doesn't collapse first. In addition to the interest rate corridor mentioned just now, there is another easily overlooked tool called non-bank liquidity support under specific scenarios. To put it bluntly, it means the central bank is personally stepping in to act as a market maker. For example, if a systemic

stampede ever breaks out in the market and non-bank institutions can't borrow regular money, what can they do? They can swap directly with the central bank to funnel liquidity to these non-bank institutions. Don't underestimate this; it is a substantive overstepping of the monetary issuance mechanism. What was the traditional way? The central bank's money only went to commercial banks, and commercial banks acted as the valve, transferring the money to non-bank institutions. But recently, China's economy really has small temples with big gusts of wind blowing! I don't know if everyone remembers the negative feedback loop of wealth management product redemption at the end of 2022—asset prices plummeted, and commercial banks got scared and immediately shut the valve, causing the default probability of non-bank institutions to skyrocket instantly. Well, now look at this, referencing the swap facility from October 2024, it has now transformed into bypassing the commercial bank intermediary. As long as non-bank institutions still hold qualified collateral in their hands, they can bypass this shock valve and directly go to the central bank to exchange it for government bonds or central bank bills and other

high-liquidity assets. This is equivalent to what? It's equivalent to the central bank forcibly clearing their default probability to zero. That's why I said, what does this mean? It means the central bank's decision-making has upgraded from the past role of lender of last resort to now upgrading to a market maker. Once the market is unable to trade, it steps in personally, though the cost and risks are huge. The biggest risk is moral hazard. Why? Because it's equivalent to the central bank giving this gang of non-bank giants a free central bank put option, so in the future they will only become more unscrupulous in increasing leverage and sinking credit, knowing full well that someone is backing them up anyway. This is the most typical saying in public choice theory: gains belong to me, and risks belong to society. So how will the wealth gap in Chinese society look in the future? It will continue to widen. The second layer is the external defense line, which manages capital and interest rates. One is what? One is the repurchase facility for overseas central banks, which allows foreign central banks and sovereign funds holding Chinese government bonds to let

them—these foreign sovereign institutions—directly exchange government bonds for RMB with the People's Bank. What is the CCP's People's Bank mainly afraid of right now? It's afraid of this group of foreign institutions smashing through the government bond yields. Smashing through wouldn't matter much by itself, but this would implicate a stampede among domestic institutions. However, this tool has a ceiling, which is that people have to hold your government bonds in the first place. Foreign ownership in China's bond market is currently only around 3.5%, while for US Treasuries it's over 30%. So this tool, fucking hell, is this pure panic? No, it's probably the CCP assuming that all foreign institutional investors want to smash it, so this thing is fucking by no means something to attract more money into the market, but rather what? It's the CCP's central bank personally stepping in to make a market in duration government bonds. On the other side, it authorizes Agricultural Bank, Bank of China, Industrial and Commercial Bank, Construction Bank, plus CITIC—the six major banks—to do what? Go to the Shanghai Pilot Free Trade Zone to conduct offshore RMB foreign exchange trading. This move is fucking the most panic-driven. The depth of the offshore market wasn't sufficient to begin with, and what were the tactics of international capital shorting it before?

That is, borrowing a huge amount of renminbi in the offshore market, and then dumping it to buy US dollars. What is happening now? It is using the commercial foreign exchange reserves of the six major banks to do the work. Where do these funds come from? They all belong to enterprises and individuals. How is this done? For example, as soon as the renminbi exchange rate struggles, these commercial banks will immediately cut off lending to offshore renminbi, and then directly skyrocket the overnight offshore lending interest rate. To put it bluntly, it is directly destroying the ammunition depot of the short sellers from the funding end. But are the foreign exchange reserves of the six major banks an infinite ammunition supply? Of course not. The six major banks entering the market to defend the exchange rate are burning their own offshore positions, and skyrocketing overnight interest rates is not without its cost either. The costs for ordinary people doing trade and running Taobao businesses also go up accordingly, which brings about a backlash. Another deeper paradox is that the value of the offshore market lies precisely in the word "offshore". Why is offshore valuable? It can price freely and bypass controls. If the central control wants to turn it into a semi-offshore operation, then who the fuck is crazy enough to play with this shit? The third layer is the strict control of data and tightening of regulation.

What data is strictly controlled? Well, it is interbank market data. What is being demanded now? It requires banks to report inventory, putting all data on transaction custody and settlement right on the table. The purpose is what? The purpose is to turn previous regulation from post-event discovery into real-time perception. Then this time they also launched a cross-border settlement system called e-CNY, which essentially still wants to bypass the US-dominated international clearing system. In fact, the purpose is also very obvious, which is still to monitor data, so that every cross-border renminbi transaction can be tracked step by step. When you put these three layers together, what is the real capability of this matrix? It is to pool and internalize the money within China's borders, while at the same time implementing a tough counter-cutoff against the offshore market. The purpose is still to stabilize the money market and exchange rate, and another is to add a layer of regulation. But note that among the several problems hidden in here that could kill the Chinese Communist Party, not a single one can actually be solved. Like bank net interest margins falling below the lifeline, local governments having a mountain of bad debts, and real estate credit having basically dried up.

Not a single one of these six tools directly touches these problems, and the only thing that can be considered beneficial to the stock market is that non-bank institutions, like brokerages and insurance companies, can now get money directly from the central bank, and then engage in circular lending. Then on the window guidance side, funds and insurance companies are required to steadily increase their positions every year. But this whole setup has fucking zero use for improving the real economy. This raises a question: why does this money still pool inside the financial system? Well, this brings us to the Weiyan paradox. What does it mean? It means the central bank is pumping in liquidity on the one hand, while on the other hand being forced to drain water to prevent a bond market bubble. The central bank of the Chinese Communist Party holds a huge amount of base money in its hands, but has no way to turn it into loans for the real economy. The money is still circulating internally within the financial system, neither flowing into the economy nor being controllable by the central bank as to where it runs. Now the central bank of the Chinese Communist Party is caught in the middle. The outer wall is that interest rates cannot be allowed to rise too fast, because once they rise, it will trigger a stampede in the bond market and a refinancing crisis for local government platforms.

The inner wall? That wall is that interest rates cannot be allowed to fall too fast, because once they fall, the banks' net interest margins will disappear, and they can no longer hold on now. So what is this so-called package of six new policies? It is that very, very narrow gap between the two walls, and Pan Gongsheng has to find space from within this gap. In fact, the data in Pan Gongsheng's own speech is also very clear, and you will understand it as soon as you look at it. More than 80 percent of China's economic increment relies on indirect financing, which is the money generated by bank loans. However, by 2025, in the increment of total social financing, the proportion of bank loans historically dropped to below 45 percent, while direct financing such as bonds and stocks rose to over 47 percent instead. There is something even more dismal. What is even more dismal? In the past decade, the proportion of new loans poured into real estate and local platforms has plummeted from over 60 percent to about 10 percent. What does this show? It shows that the old credit generation machine centered around real estate and urban investment has completely broken down.

At the micro level, there is a particularly obvious signal: the severe divergence between the growth rates of M1 (narrow money) and M2 (broad money). That scissors gap has persisted for a long time, remaining a deep negative value, which indicates that corporate demand deposits are drying up, and everyone is paying off loans early and stopping expansion. So, here is the problem: with so much money unable to go out and needing to find safe assets with positive returns, what will it do? It will engage in crazy involution within the financial system. The current total social financing stock exceeds 458 trillion yuan, and broad money exceeds 350 trillion yuan. Such a massive amount of money is scrambling for limited high-grade government bonds, pushing long-duration risk-free interest rates to an epic low. Banks are even more fucking miserable at this moment, effectively being held hostage from both ends. Why do I say that? Look, on the asset side, no one is borrowing money—well, to put it bluntly, even if someone wanted to borrow, they couldn't, as the capital base is just sitting there and there isn't much left. Banks are forced to buy bonds, with bond holdings exceeding 100 trillion yuan, accounting for about a quarter of total assets. The result? The more they buy, the lower the yield, leading to a vicious cycle. On the liability side, deposit rates have been suppressed round after round, but the room for further cuts is getting smaller and smaller; if they cut any further, there will be nothing left. The net interest margin of banks fell to only about 1.3% last quarter, completely hugging that 1% regulatory red line. Bank of Communications is even more exaggerated, down to just 1.2%. Bank of China and ICBC are slightly better, but not by much—one is at 1.28% and the other at 1.29%. Squeezed from both ends, the constitution of China's commercial banks is now extremely poor. This is no longer a normal fluctuation of profits within an economic cycle; this is the core medium of monetary policy transmission—the banks themselves—being systematically corroded. If your medium is rotten, can the transmission efficiency be any good?

There was also a particularly face-slapping event yesterday; it really was a case of being slapped in the face right after speaking. On the very same day Pan Gongsheng talked about this, the State Council of the CCP announced the issuance of 300 billion yuan in special treasury bonds, again to replenish the capital of the six major banks. What did they say? They still have to replenish it in June or July, right? Well, isn't this the replenishment? Putting these two actions together is equivalent to admitting on the same day that the banks' capital is being consumed, and the speed of consumption has far exceeded their own ability to replenish it. As for the local government financing vehicles, let's not even get into the mess of their accounts; enough has already been said about that. Of course, if interest rates go down, the benefit is that refinancing existing debt becomes cheaper, but what is the downside? They still fucking can't pay back the money, and they can't even achieve a nominal reduction in debt, because these guys ultimately rely on selling land to pay back the money, and there is no need to elaborate on the current situation of the land market. I've said enough about that before. The source of repayment has dried up on its own, so why is Pan Gongsheng now unleashing these so-called six major tools? Pan Gongsheng must be feeling particularly miserable right now. Why? Because interest rates cannot go up for fear of detonating the financing vehicles, and they cannot drop too fast because the banks' loan interest spreads are already as thin as a blade, and monetary policy has completely held fiscal policy hostage on the issue of local government debt.

If we straighten out the entire transmission chain, we can clearly see exactly what these tools can reach. Let's look at it layer by layer: the central bank injects base money, and liquidity in the interbank market is still abundant and effective. Moving down to whether banks are willing to lend, the first breakpoint appears: the banks' own interest spreads cannot sustain it, they are unwilling to lend at low rates, and the risk conversion of loans is far lower than that of government bonds—government bonds can be treated as cash one-to-one, but loans cannot. Moving further down to whether companies want to borrow, this is the second breakpoint: companies themselves are repairing their balance sheets and do not want to borrow. Moving further down to real economic activity, this is the third breakpoint: domestic demand is shrinking, export expectations are unclear, and companies dare not invest. So, do you see it now? The six so-called new policies only touch the first link, which is interbank liquidity management plus a foreign exchange stability channel; they have no direct effect on the second or third breakpoints. So what is Pan Gongsheng doing now? It is a defensive contraction. The core malaise of the Chinese economy has completely exceeded the effective boundaries of monetary policy, so all this liquidity can only scurry back and forth between financial assets.

So, is this strategy a dead end, or is there a possible way out? Let's not just speculate; let's look at history. There are quite a few mirrors we can look at, at least two. The first is Japan in the 1990s. After the Plaza Accord was signed, the yen appreciated sharply, right? That was an external pressure. At the same time, the domestic real estate and stock market bubbles burst, which was a process of internal deleveraging. Caught in this pincer movement, the Bank of Japan slashed interest rates from around 6% to near zero and kept them there for over a decade. The result? Credit fucking wouldn't pick up, and the economy remained soaked in deflation for thirty years. Why? Because companies, households, and banks were all paying off debts and repairing their balance sheets instead of investing. Monetary policy can lower the cost of borrowing, but it cannot create the willingness to borrow. You all understand this, right? Furthermore, the most fatal mistake the Bank of Japan made back then was admitting to bad debts too late, which resulted in a bunch of zombie banks occupying credit resources. Then, in 1997, they tightened policy too early, cutting off a fragile recovery. Look at China today: interest rate spreads are struggling to go down, and bank profits are struggling to drop. I won't even mention anything else; the Ministry of Finance has already injected over 1.5 trillion yuan to replenish bank capital, and this is while the CCP still refuses to acknowledge bad debts. If they were to admit the bad debts, you'd see if this capital is enough—it would be wiped out immediately, and all six major banks would go bankrupt without exception.

The second classic example is Europe. Around 2010, the European debt crisis broke out, right? Then in 2012, European Central Bank President Draghi said he would do whatever it takes to overcome the debt crisis. And what did he do afterward? Well, nothing. Draghi pioneered a school of thought: relying on words without taking action, which is a paradigm of policy tools. The European Central Bank's direct monetary transaction tool, honestly, was nice to look at but hard to use. Because once this thing was used, it came with very harsh conditions. The result was that no country ever borrowed from it, and it was never used once. But at that time, the market believed that the ECB had the ability and the willingness to act, and so the crisis was suppressed. Actually, the CCP's non-bank liquidity tool uses the same logic. But the CCP faces a difficulty that the European Central Bank didn't have: the European Central Bank relied on institutional independence and credibility, which is why Draghi's "whatever it takes" was credible. But these CCP bastards have absolutely no institutions and no rules; they rely entirely on fucking political will and power. Plus, what else? The CCP's own words are no different from farting. So, the CCP's bullshit, at least to me, is worth absolutely nothing.

Speaking of this, we have to calculate the most realistic account: who is paying for this defense, and who is benefiting? Those who pay the most and are the most wronged are the depositors and the common people. Why? Because interest rates are being suppressed again and again by administrative means, while the asset side—the houses—has absolutely no hope now. And on the liability side, the actual interest rates are still hanging high. Let's calculate: last quarter, the first quarter of 2026, the one-year benchmark deposit interest rate was about 1.35%, and the inflation rate was about 0.4%. These are the CCP's own figures, mind you. Even calculating based on the CCP's own data, the real interest rate is about 0.95%. It looks positive, but we have to consider one thing: people have no confidence in their future income at all. This bit of return is basically negligible for stimulating consumption; you don't even need to count it. So, to put it bluntly, what is such a low interest rate? It is the depositors being forced to pay an invisible tax to subsidize banks and local government debt. What is this called in public choice theory? It's called cost dispersion and benefit concentration. Who is the second victim? Commercial banks, especially those city commercial banks, rural commercial banks, as well as export enterprises and private entities. And who is benefiting? Local government financing platforms. What are they living on now? They are relying on low interest rates to roll over their hidden debts. Who else? Non-bank giants that can crazily leverage. Why? Because you guys got the central bank to provide a timely bailout. Furthermore, zombie state-owned enterprises that should have been eliminated, as well as backward production capacity, can survive on this cheap rollover loan, continuing to occupy land, labor, and capital. So we will see a situation where one group is desperately transfusing blood to support these fucking idiots, while on the other side is a mechanism that refuses to clear out. When these two sides are combined, how long can it last? I think this is the truly critical question.

We need to correct a common misunderstanding: the foreign exchange upper limit is not determined by the absolute amount of USD 3 trillion in foreign exchange reserves, because a significant portion of this has already been sunk into illiquid overseas infrastructure loans and that fucking Western European Belt and Road. In fact, the true ceiling is set by two hard bottom lines. The first one is the relocation of resident savings. When the nominal interest rate on deposits irreversibly approaches zero—or becomes effectively negative after deducting inflation—real estate will be completely finished. By that time, the ordinary people's tolerance will probably be reaching its limit. At most, the Chinese Communist Party (CCP) can try to keep itself on life support by pumping up the stock market, but pumping up the stock market has one major flaw: this thing cannot rise to the heavens. Moreover, Chinese citizens love to buy when prices rise and not when they fall. What does that mean? It means this thing fucking cannot fall, because the CCP has effectively created another pressure cooker, and this fucking thing must not explode; if it explodes, it will be like the late Qing Dynasty stock market speculation leading right up to the Wuchang Uprising. As mentioned before, what is the CCP most afraid of right now? Or rather, what is the most fragile end of China's financial system? It is that the people might abandon banks, converting their deposits into cash, hoarding physical gold directly, or moving money out through gray channels. If they have no money, they simply choose to lie flat. In short, it all comes down to one sentence: compress one's balance sheet to the absolute minimum. Once a large-scale, widespread outflow of deposits occurs, commercial banks will lose their cheapest and most stable core source of liabilities. At that point, the CCP will lose the contributor to the sterilization effect.

The second risk is what? It is that the capital adequacy ratio of banks will be breached. The problem right now is also very simple: the bad loan ratio remains stubbornly high, and the net interest margin has been squeezed to this wretched state. Banks can no longer rely on retained profits to replenish their capital. If these non-bank bailouts and local government financing vehicle (LGFV) risk mitigations all rely on banks acting as the cushion in the middle, the bad loans will inevitably and continuously erode the banks' balance sheets. There will eventually be an end to concealing things on the balance sheet. Once your capital adequacy ratio falls below the Basel red line, banks will be forced into drastic deleveraging, and the credit creation of the entire society will freeze instantly. Unless the CCP's Ministry of Finance endlessly replenishes the banks' capital, things will get interesting at that point: the public and the CCP's Ministry of Finance will turn into a seesaw. As soon as public deposits run, the CCP will directly become the contributor to the leverage effect. And if the public's deposits are restricted, then the cost of this effect will be borne by the public. Conversely, the harder the public moves their deposits away, the more the CCP will have to issue bonds to sustain itself; and the more bonds it issues, the harder this interest rate corridor is to control, and the more the CCP's central bank has to clean up the mess. What happens then? Let's see if Pan Gongsheng can compress this interest rate corridor to 25 basis points! Furthermore, the cost of the path taken by the CCP's central bank is extremely high, because it has directly thrown away the two most valuable functions of a financial market: one is free pricing based on genuine risk, and the other is efficient allocation based on rate of return.

What kind of entity will the CCP's commercial banks degenerate into now? They will degenerate into a debt-bookkeeping machine purely designed to keep the books from collapsing while covering up bad loans. What is the situation now? It's that zombie sectors are occupying cheap money, while truly vibrant and innovative private enterprises are being literally starved to death because risk pricing is paralyzed and liquidity is locked up. This is so-called financial sclerosis. Previously, the CCP's central bank was like juggling three balls with two hands; now it's directly juggling six balls, and these balls are currently exceptionally difficult to throw. As soon as one drops to the ground, all of them will drop. Therefore, I am not envious of the salary Pan Gongsheng makes at all. You really are fucking awesome, let's see how long you can keep this game going!