Lowering interest rates kills banks first, not lowering them kills borrowers first! 8 trillion in resident demand exits circulation, every 100 bps rise in long-term rates costs banks 4.5 trillion in losses, banks reduced to fiscal departments, implicit debt drops by 7.8 trillion while legal debt surges by 14.1 trillion! The financial deadlock of the Chinese Communist Party, rural commercial banks likely to blow up first next year

This video provides an in-depth analysis of the current financial deadlock facing China. Using detailed data, the host points out that the increase in household savings does not reflect consumption potential, but rather a collective balance sheet recession and the withdrawal of demand from the economic cycle due to uncertainty about the future. Meanwhile, the central bank is caught in a dilemma between cutting and not cutting interest rates; both long-term and short-term rates are constrained by bank net interest margins and insurance redemption gaps, trapping the system in a "terror balance" where it cannot move. Through special treasury bond injections and the replacement of local hidden debt, the Ministry of Finance has effectively turned commercial banks into an arm of the fiscal department. The video concludes with a warning about multiple financial risks, including the maturity of real estate developer debt extensions at the end of the year, the budget in March next year, and the deadline for financing platforms in mid-2027, specifically highlighting the potential for a large-scale collapse of small and medium-sized rural commercial banks.

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Let's stick to the facts and refuse casual understandings. As we left off in our previous book section, the last episode covered the accounts for August, so let's briefly summarize the urban background: the new loans in August were 60 billion, and the rolling 12-month money borrowed by the private sector stood at 20.2 trillion. After paying 11.5 trillion in interest, repaying 3 trillion in early mortgage payments, and deducting 4.1 trillion in bad debt disposal and 1.2 trillion in replacement losses, what was the net capital release? Less than 0.3 trillion, or 300 billion RMB. For an economy as large as China, you can almost treat it as zero. Combined with exports and government spending, China's private demand is shrinking at an annual rate of 3% to 5%. Everyone talks about deflation, and this is the speed of deflation. Today, we will continue discussing the narrative spin of the Chinese Communist Party (CCP), addressing the remaining two arguments, and then look at what the CCP's central bank is actually doing this year, how large the capital gap of the central bank still is, and finally, on whose head this debt resolution has ultimately placed the bad debts. Alright, let's continue. First, regarding what the CCP says about household savings—how do they put it? They claim household savings surged by 7 trillion, arguing this reflects a resilient wealth and consumer potential. Oh, these people dare to use such an intuitively appealing narrative strategy, assuming that rising savings naturally implies consumption potential. This logic simply does not hold. They don't look at how these savings were formed, nor do they care whose savings these actually are. I'm telling you, if these savings belonged to my great-grandmother, you can rest assured she would still pinch every penny on her plate and could not bear to spend a dime. Furthermore, the more intuitive-driven this description is—especially when uttered by some so-called CCP idiot expert—the more problematic the statement becomes. This is the second law of CCP narratives that I propose. First, look at the numbers. How much was this 7 trillion figure really? It was 6.99 trillion—what the CCP calls 7 trillion—yet compared to the same period last year, it dropped by 2.78 trillion in new additions. The CCP's current rhetoric has shifted to "savings moving house," claiming funds are flowing into the stock market and wealth management products. Non-bank deposits did indeed increase by 6.32 trillion in the first eight months. Just look at the kind of arguments presented by these CCP idiot experts—the kind of level where you don't even need to have studied any basic economic common sense. Using the most naive, most intuitive way, they put two numbers together and then claim that non-bank deposits increased while bank deposits decreased, using this angle to argue—what? To argue that there is consumer potential. But this precisely triggers what? The second law of CCP narratives! If the economy could be interpreted this way, what the hell is the CCP feeding all those useless experts for? So let's blow up both of these plates together. As we can see, while savings increased by 7 trillion, how much did household loans decrease? By 1.03 trillion, right? In other words, the same sector was net-repaying 1 trillion in debt on one hand, while net-increasing 7 trillion in savings on the other. In just 8 months, the money residents deposited in banks minus the money they owed to banks—this entire chunk—wasn't 7 trillion, but a full 8 trillion, right? So for every family, what does this mean? It means spending less and saving more so they can feel a bit more secure inside. But if everyone gets frightened and refuses to spend a single cent, merchants' businesses will inevitably shrink. Just look at what shopping malls in Shenzhen, Guangzhou, and Shanghai look like right now, and online shopping data is also plummeting wildly. This is glaring, ready-made evidence. Accompanying these phenomena is—what? Employment will inevitably become harder, employee incomes will also decrease correspondingly, and in the end, even though everyone wants to save more money, they might not necessarily end up saving more. So what does this figure actually describe? Does it describe the CCP talking out of its ass about having 8 trillion in consumer potential, or does it mean 8 trillion in demand has exited the economic cycle? Then let's look at other corroborating data: retail sales in August increased by a mere 0.4%, which is still likely faked by those bastards. What is the most real? The most real thing is that in July, the hottest month, residents' electricity consumption actually dropped by 5.1%. This is the actual scene after those 8 trillion were sucked out. Look at the one-year deposit interest rate now at around 2.95%; residents are still saving money under near-zero interest rate expectations. There is only one explanation: residents are extremely uncertain about future cash flows, and this uncertainty has completely overwhelmed their sensitivity to interest rates. Not to mention anything else, even the CCP's own ministries have put back pay for teachers and doctors onto governance checklists. This is already a widespread social phenomenon, the real youth unemployment rate is close to 30%, and housing prices are steadily sliding. With so many sources of uncertainty, how can anyone interpret this tiny bit of savings as consumer potential? Sometimes I really have to admire the mindset of these people among the CCP bandits. Unless the CCP now counts savings moved into the stock market as consumption, treating people who move money into the stock market as financial consumers. Look at this: stock market stamp tax revenue in the first eight months rose nearly twofold year-on-year, but that is just turnover—turnover that creates no fixed assets, merely shuffling existing stock back and forth among residents, brokerages, the treasury, and insurance companies. On the residents' side, they repaid 1 trillion in loans on one hand and deposited 7 trillion in savings on the other. This damn thing isn't wealthy resilience; it is a collective deleveraging of 1.4 billion people. Under this state and background, the more savings there are and the more money moved into the stock market, the more it can only prove one thing: people are increasingly afraid to spend money and are increasingly unable to find suitable things to do.

What surprises me the most is the announcement's claim about "steady and favorable interest rate cuts" and "sufficiently guaranteed financing costs." The CCP are truly masters of self-consolation. Let's verify the facts: the People's Bank of China (PBOC) has neither cut the reserve requirement ratio nor interest rates throughout 2026. The 7-day reverse repo rate has remained at 1.4% since May of last year. The Loan Prime Rate (LPR)—the one-year rate at 3% and the five-year rate at 3.5%—has also remained unchanged since May 20, 2024, for 16 consecutive months. Although the CCP's current narrative is one of "moderate easing," the situation is actually a game of "terror equilibrium." Do they dare to cut rates? If they do, can the banks handle it? Today, let's look at the real interest rates by sector. What does that mean? Real interest rate equals nominal interest rate minus the price change faced by the borrower. For example, the current mortgage rate for residents is 3.05%, right? But what price are residents facing? Take housing prices, for instance. Second-hand home prices in second-tier cities fell by 4.9% year-on-year this year. This is based on the CCP's listed prices; the real transaction prices and liquidity are far worse than that 4.9%. But never mind, let's use their 4.9% figure. Even under these conditions, the real mortgage rate for residents is 3% plus 4.9%, nearly an 8% real interest rate for buying a home. Has the manufacturing sector fared any better? The loan interest rate for downstream manufacturing is 3%, and factory-gate prices are still falling, while upstream coal prices rose by 26.6% and non-ferrous metals by 28%. Once this trickles down to downstream enterprises, the total cost inflation is 2% to 5%. Therefore, the real interest rate for downstream manufacturing should be 5% to 8%. Meanwhile, for upstream coal and non-ferrous sectors, factory-gate prices rose by 5% to 27%, meaning they are facing negative interest rates. You see, on the same sheet, the upstream has negative interest rates, while the downstream and residents face a tightening rate of 5% to 8%. Thus, monetary policy remains very tight for sectors that need credit. So why doesn't the CCP central bank cut rates? Is it because they don't want to? No, damn it, it's because they don't dare. The net interest margin of commercial banks in the second quarter was only 1.25%. The annual reports of the four major state-owned banks show margins of only 1.23% to 1.29%. The deposit side is even worse; the one-year rate is already down to 0.95%, leaving no room. In 2026, the deposit cost rate for China Construction Bank dropped by 29 basis points, and the interest-bearing liability cost for the Bank of China dropped by 35 basis points. This is the last bit of "dividend" for banks after deposit repricing, and this dividend is not infinite; it will be exhausted by the first half of 2027. After that, every 10-basis-point cut in the LPR will directly hit this margin. I calculated a matrix: for every 20-basis-point drop in net interest margin, commercial banks face a capital shortfall of 0.4 trillion yuan annually—that's 400 billion RMB. The central bank hasn't cut rates for 16 months; it's not being "steady," it's simply terrified. If they cut rates once, the banks will die first. If they don't cut, what happens? The borrowers will die first. So the central bank can only choose to drag it out. That is why we see this phenomenon: the frantic suppression of the interest rate corridor width, cutting it in half from 50 basis points. It's not because of higher policy precision, but because the banks can't withstand the volatility. We've talked enough about these bullshit narratives. Let's get to the final layer: many self-media outlets within the Great Firewall are saying that the central bank is releasing liquidity while selling government bonds to wrestle with the market and control the yield curve. Damn, that's complete nonsense. Since the beginning of this year, the CCP's central bank hasn't sold a single government bond. The last time they borrowed bonds to sell was on July 1, 2024. From January to September this year, the CCP's central bank has been very, very steadily net-buying government bonds in the secondary market every month. Look at the monthly figures, totaling 400 billion. And that 10 billion in June was the lowest month since they resumed bond buying in October 2025. In August, the Medium-term Lending Facility (MLF)—the one-year funds the central bank provides to banks—saw 500 billion renewed out of 600 billion due, a net withdrawal of 100 billion. As for the outright reverse repos, they added 200 billion each in July and August, and the two batches between September 7 and September 15 were changed to equal-amount renewals. Does this look familiar? It's called "reducing the long-term and increasing the short-term," the same technique as Bessent's yield curve control. Why don't they need to sell government bonds? Because they have already frozen the yield curve. The yield on China's 10-year government bond was highest in January at 1.9%, hit a low of 1.675% on August 14, and has been hovering around 1.7% in September. It has been range-bound within 25 basis points all year. You see it now, right? It looks exactly like the People's Bank of China controlling the curve in the secondary market. What the Chinese central bank is doing now by using three things to replace bond selling to control the curve is just buying time. For 16 months, they have kept the short end pegged around 1.4%, with hundreds of billions every month, acting as a buyer for debt repayment. Why? To force the commercial banking system to passively shorten its duration. What the CCP central bank fears most now is not the balance sheets of domestic banks, but the exchange rate. Exports are currently the only economic sector in China that is still running. They claim it rose by over 20% in August, but we don't care about that; we've done the math, and this matter...

I also made a show, so what is the thing the People's Bank of China (PBOC) fears the most right now? They fear that US AI capital expenditures will suddenly stop. That would trigger a truly terrifying and intense chain reaction. Right now, by using central bank intervention, locking down capital channels, and relying on strong exports, they can still provide the People's Bank of China with the ammunition for exchange rate intervention. But once this process reverses—meaning the export settlement phase, the exchange rate support phase—a fierce crisis will break out in a very short time. At that point, China's interest rate spread of minus 333 basis points will be an immense pressure indeed. If the CCP wants to intervene in the exchange rate again by then, it will only be able to frantically subsidize RMB deposit rates in the offshore RMB market. Going down to the more grassroots level, what do we see? Small and medium-sized banks. Right now, small and medium-sized banks are forced into speculative bond holding—well, maybe you can't even call it speculative bond holding, but let's look at this structure: what is their average deposit cost? It is over 1.6%. But what are they buying with it? They are buying short-term bonds with a yield of 2.2%. Their attitude is also very clear: drag it out for as many days as they can, right? From 2026 until now, more than 400 rural banks have exited the market. And that doesn't even count the 312 high-risk institutions marked in red by the People's Bank of China's financial stability mechanism, which involve total assets of 9.4 trillion. The most brutal part has to be the pricing anchor: the 10-year yield at 1.69%. This is not the market pricing the future; it is a survival line set by the central bank for itself and for insurance companies. The logic is simple: your 10-year yield needs to at least be higher than the deposit cost of 2.95%, right? But insurance assets are in the most miserable shape right now. Why is that? Didn't insurance companies buy a lot of 20- to 30-year long bonds before? And what is the yield on 30-year bonds under the CCP right now? It is 2.17%. They are now struggling as hard as they can to reach that ultimate interest rate of 4.5% for insurance liabilities. I already calculated this in my early September episode—there is simply no way they can reach it. So what is the insurance gap right now? The gap is between 2.5 trillion and 3.5 trillion. Furthermore, the long-end yields cannot drop. If they drop, the solvency of the insurance companies will be shattered first. Nor can the long-end yields rise: commercial banks hold over 100 trillion in bonds, accounting for 25% of their total assets. If calculated on a 4.5-year duration, every 100-basis-point increase would cause their book value to shrink by 4.5 trillion, which is 7% of their 27 trillion in core tier-one capital. To put it bluntly, if profits go down, insurance companies can't take it; if yields go up, banks can't bear it. Profits have now completely turned into a tool for sharing pressure on both sides. Therefore, it is hard for them to truly reflect market supply and demand. The central bank doesn't even need to sell government bonds; this situation where neither end can move has already jammed the government bond market. As for the banking side, I can explain it with just one matrix. Look here: current economic weakness is 0.25%, reporting credit cost is 0.5%, total asset yield is only 0.54%, return on equity is 6.8%, 70% is retained, endogenous capital grew by 4.7% in a year, risk-weighted assets grew by 7.5% in a year, and core tier-one capital is 27 trillion. So what is the annual capital gap? It is 0.75 trillion, as everyone can see. Last year's 500, billion plus this year's 300 billion—the capital injections from the two rounds of special government bonds total exactly 800 billion, which equals the two-year gap on the reporting caliber. Of course, there is also a 50 billion margin of error. Therefore, the scale of fiscal capital injection is not a policy choice; it is an output of this matrix. If calculated based on my real credit cost of 1.05% after merging and writing off transfers, how much is the annual shortage? It's 1.35 trillion. Why didn't the Ministry of Finance inject capital to cover this extra 0.6 trillion? Because the banks right now still have provisions being used to cushion existing loans. Look at the average provision coverage ratio of these major state-owned banks: it has dropped from 205.21% in 2025 to 202.87% now. This is the current speed at which provisions are being depleted. Let's look at the accounting path of the capital injection: the Ministry of Finance issues these special government bonds, and then commercial banks form an underwriting syndicate to buy these bonds—the first tranche of 2025 bought 1650 billion. Then it has a 5-year term with a coupon rate of 1.45%. After the Ministry of Finance gets the money, it makes a targeted private placement to subscribe to the bank's shares. At this point, the bank's core tier-one capital increases. When we consolidate the entire system, the bank's assets have an extra batch of government bonds, and its capital has an extra batch of fiscal equity. Therefore, the only net increase is the balance of these government bonds. Then the banks use this capital to take over the next year's replacement bonds and special government bonds. Meanwhile, the Ministry of Finance takes the bank's dividends, returning 260 billion a year. Injecting 800 billion over two years is equivalent to 300 billion in dividends. Huijin is already the largest shareholder in the middle of these functions. Then in February last year, the Ministry of Finance transferred three asset management companies—Great Wall, Orient, and Cinda—to Huijin for free. In other words, the buyer of bad debts and the seller of bad debts now come from the same boss. Look, the capital comes from government bonds, the assets are government bonds, and the bad debts are sold to an asset management company controlled by the Ministry of Finance. At this point, what is the actual nature of the banks? Economically speaking, haven't the banks simply become a department of the Ministry of Finance?

Let us also look at the Chinese Communist Party's self-amused debt swapping. Let us lay out the data first: what is the total scale of the support debt? It is 6 trillion, right? That is 2 trillion each for 2024, 2025, and 2026. By the end of August this year, 5.84 trillion has already been issued, accounting for 97.3% of the total scale. 2026 is the final year, and this hidden debt is what—the version where the Chinese Communist Party issued over 10 trillion in a year, reaching 14 trillion, right? Okay, even if we take the Chinese Communist Party's annual figure, let us look at the change in stock: by the end of 2025, local hidden debt will have 6.5 trillion remaining, compared to 14.3 trillion at the end of 2023. Supposedly, 7.8 trillion was spent over two years. During the same period, local statutory debt surged from 40.7 trillion at the end of 2023 to 54.8 trillion by the end of 2025, meaning it increased by 14.1 trillion by the end of last year, and by now it has already broken through 60 trillion. Look at this: hidden debt decreased by 7.8 trillion, but statutory debt increased by more than 15 trillion. So what on earth is the Chinese Communist Party spending money on now? Furthermore, this kind of swap only solves what? It only solves the interest problem. What was the approximate cost of the previous 2 trillion in hidden debt? It was around 5.5%. So the annual interest would be 110. billion. Swapped to a cost of 2.07%, the annual interest is only 41.4 billion, saving a full 68.6 billion. The money saved is simply the interest that the banks collect less, right? Then, who bears this portion of interest that the banks collect less? It is borne by the 0.95% deposit interest rate. As I already mentioned in my previous episode calculating the savings tax, household deposits stand at 173 trillion, and every 50 basis points suppressed amounts to how much? It is 867 billion. As for the principal of this 2 trillion, it hasn't disappeared either; it was just moved from the balance sheets of local financing platforms to the statutory debt balance sheets of local governments, and then commercial banks hold it again in the form of local government bonds. Do you see the logic here? Bad debts were transferred from where on the financing platforms' balance sheets? Transferred to the banks' balance sheets. And then transferred from where on the banks' balance sheets? Transferred into the depositors' interest. Is the whole process clear now? As for the unswapped portion—that part is the fucking deadliest. By the end of 2025, it is said that over 82% of financing platforms have already exited. And furthermore, their fucking exit method was extremely bizarre: they didn't exit by paying back the money; they exited by changing their names. The process was extremely crude and simple, let us take a look: they renamed local platform debts to what? They called them operational financial debts. This portion is reportedly still 5 to 7 trillion, and it is stipulated that before June 30, 2027, platforms must completely divest from government backing. If the debt is not repaid by the deadline, then the fate of these financing platforms will be—as the Chinese Communist Party itself said—that if creditors agree, they will restructure; if they disagree, they will default in a market-oriented manner. The statistically traceable stock of this part is 9.87 trillion, and there is still at least 40 trillion in hidden debt that hasn't even surfaced, because the hidden debt acknowledged by the Chinese Communist Party is only around 14 trillion. Even if you add some random debts issued by local authorities, it is only about 23 trillion to 24 trillion, which simply doesn't match the 60 to 80 trillion scale of hidden debt. What should be done about this part that hasn't surfaced? I see the Chinese Communist Party just brushing it under the rug; isn't that just tough luck? But you can rest assured, even though the Chinese Communist Party says with its mouth that in June 2027 these rotten debts will default where they should and restructure where they should, the scale of this debt relief, plus the fact that the bills are mostly paid by commercial banks, means the Chinese Communist Party is just putting on a show with words during this period. For example, treating a funeral as a happy event, pretending that this hidden debt has already dropped to zero, and afterwards, they will still have to wipe their own asses.

If we look at these two episodes together, what do we see? It is a death trap. Look, if they cut interest rates, the banks' net interest margins will die; if they don't cut rates, borrowers will be in extreme pain. If you suppress the long end, insurance companies will die; if you raise the long end, bank capital will die. If they issue more debt, the banks' net interest margins will structurally sink; if they issue less debt, social financing, nominal GDP, and tax revenue will all collapse together. If they continue to issue debt, depositors and banks will bleed out; if they stop issuing debt, the urban investment bonds and rural commercial banks simply won't be able to hold on. If they continue to inject capital, the CCP's sovereign credit will merge with the banks' bad debts into one rotten balance sheet; if they stop injecting capital, small and medium-sized banks will inevitably go bankrupt. Do you see it? It is truly a tangled mess; no single lever can move independently. That is why the central bank hasn't moved the interest rate for 16 months. The CCP's idiotic government also injects capital every year, and regulators shut down hundreds of small banks annually. Their only common goal is to prevent any single lever from moving. This is not some bullshit policy theorem; it is a death trap combined with a tangled mess. So, where will the first domino fall? Look at these hidden risks. First, the timing for the first hidden risk is the end of this year, December 31st. Why? Because in November 2022, China introduced a financial policy, which included a clause stating that the loan extension policy for real estate developers would expire. If these extended loans are not renewed, they must be classified according to their true status. The non-performing loan ratio of Chinese commercial banks to the real estate sector is currently 5% to 7%. This is a huge bomb. So just watch, they will have to extend it, but they can't keep extending it forever. The second hidden risk is the budget meeting next March, because the Ministry of Finance must answer two questions: whether there will be new replacement quotas in 2027, since the 6 trillion yuan has been completely exhausted this year. The final hidden risk is June 30, 2027, the deadline for urban investment platforms, which coincides with the peak of urban investment bond maturities in the first half of 2027. These deadlines overlap within six months, and the point of impact is the rural small and medium-sized banks, which have the highest proportion of urban investment loans and social financing loans, the highest non-performing loan ratios, the thinnest provisions, and have already seen their net profits turn negative across the industry. It is the same group of people. So, next year, you are very likely to see a larger wave of bankruptcies among small and medium-sized banks. But is that the end of it? No, because the most fierce risk is the external hidden risk. The external hidden risk is the U.S. capital expenditure cycle. In 2026, you will discover a problem: all the improvements in China's nominal indicators, especially export growth, the doubling of electronics profits, and the floating profits of insurance companies' stock investments, all stand on the legs of AI and electronics. The current situation is that the U.S. 10-year Treasury yield is 5%. This interest rate spread will become the biggest killer. If China's export leg is broken, PPI will immediately turn negative, and CPI will fall into even deeper deflation. The ratio of interest to GDP growth will also jump directly, and your market growth will inevitably turn negative. Even if the CCP digs three feet into the ground everywhere, it won't be able to squeeze out any more money. The trend of deposit migration will continue. Of course, judging by the CCP's current shameless code of conduct, capital controls next year will become even more perverted. But having said that, the rural commercial banks managed by the provinces next year will be the biggest bombs. Why? Because only by reducing capital and then increasing capital can they survive. This window is already visible in the first and second quarters of next year. I think the probability of this happening to rural commercial banks within 12 months is between 55% and 65%. Next is the Ministry of Finance's latest budget in March next year. I estimate that capital injections into major banks will continue to expand to the level of over 500 billion, and there will be a series of additional replacements. Don't even think about it, there is an 80% probability that this will happen. Because it is really interesting right now. What is interesting is that the CCP's Ministry of Finance is systematically consolidating its balance sheet with commercial banks. Of course, if AI capital expenditure is interrupted, all of the CCP's financial bombs will erupt simultaneously. Starting from the market structure in August, we have basically dissected the CCP's entire financial system. Do you see it? It is not that the CCP's central bank doesn't want to move the interest rate curve; it is that they must first hold the interest rate curve steady and drag it out, hoping to encounter another opportunity like the WTO accession in 2001. Back in 1999, using these tricks at least gave people some hope; no matter what, there was still a motivation to drag it out. Now, what is the point of dragging it out? It is simply because there are no other tricks left; they can only take one step at a time. They absolutely dare not move this interest rate curve. The fiscal authorities pour government bonds into banks every year to swap for equity, and then the banks use that equity to buy more Ministry of Finance bonds. Local governments are left with nothing but collection and law enforcement; even the salaries of teachers and doctors are being clawed back. Every action the CCP takes now is aimed at one thing: preventing this lever from moving, because both sides of this lever are connected to earth-shattering bombs. Alright, that's all for today. If you like my show, please remember to click the bell below. If you want to support me, please join the membership. The membership includes four in-depth programs every month. Welcome to join the membership group. See you in the next episode.