R2 wealth management products lost half a month's earnings in two days; 12 wealth management subsidiaries wrote collective letters! 155 million people bought credit bonds thinking they were deposits! Debt resolution pushes deposit rates to 0.95%, forcing you to bail out banks! Huafa defaults, retail investors bear the burden of hundreds of billions! Appeasement letters are just sales pitches! The quasi-deposit illusion is shattered!

Analyzed the net value pullback phenomenon of Bank of China R2 wealth management products at the end of October due to credit bond crises such as Zhuhai Huafa. It points out that behind this are structural problems such as fiscal debt resolution, deposit interest rates being suppressed to the floor, and wealth management products outsourcing long-term risks to bond funds, ultimately shifting market fluctuations and losses to the 155 million ordinary retail investors who bought wealth management products.

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Observe things like a master, refuse fragmented cognition. A couple of days ago, you know, I saw a pretty interesting thing. The state-owned bank wealth management issued an article called Putting Investors in Volatility and Waiting for Stabilization. By October 5th, the Agricultural Bank's wealth management company followed up, Everbright Wealth followed up, and CITIC Wealth followed up too. Anyway, it was like grapes, a whole bunch of them—twelve bank wealth management subsidiaries in total followed up together, all fucking writing letters to their clients collectively. Why? Because right on that Friday, October 30th, those bank wealth management products that these banks usually sell, labeled with R2 medium-low risk and treated by the Chinese public as substitutes for time deposits, simply dropped. Some people lost half a month's earnings in just two days; some people made over 1700 RMB during this period in October, but on the very last day of late October, they directly lost over 2300 RMB. I call this paradigm the shattering of the quasi-deposit illusion.

What does that mean? It means ordinary people think they are buying a deposit with a slightly higher interest rate than a regular savings account. But what are they actually buying? They are buying a debt-resolution meat grinder, and they are the final stage serving as the meat filling. I will explain why it's the meat filling in a moment. And the entry point? That forced mechanism of fiscal debt resolution. The middle stage? Deposit interest rates being crushed to the floor. The exit? Chinese citizens having to pay the bill every day according to this kind of administrative pricing. Before we unfold today's topic, let's first make clear what an R2 product is. According to risk classification, Chinese bank wealth management products are divided into five tiers. R1 is the lowest risk, and R5 is the highest risk; the larger the number, the higher the risk. R2 corresponds to medium-low risk, which is the tier that the vast majority of people can buy in their banking apps. As of the end of September this year, the total scale of bank wealth management in China was 35.37 trillion, the number of people buying wealth management products was 1.55 billion, and about 95% of the wealth management funds are parked in these two tiers, R2 and R1. What does this show? The wealth management market is not an investment market at all; it is a pool treated as a savings account by more than 150 million people. It is treated as savings by these people, but it is not savings, and the starting point of the matter is not October 30, but September. What was the trigger actually? It was the Huafa default. Let's see, Huafa's accounts have been discussed before, so we'll just briefly touch on it. Huafa's interest-bearing liabilities exceed 500 billion, with over 160 billion maturing within a year, but the available cash currently on the books is only about 50 billion. In September, they started to panic and sought a rollover from the banks, but all three banks rejected it. On October 26, two trust products directly defaulted. We have already talked about this before. Today's focus is on how Zhuhai is going to rescue this situation. Just last week, on October 4, what did Zou Hui, the director of the Zhuhai Municipal State-owned Assets Supervision and Administration Commission, say? He said that the support funds already implemented exceeded 40 billion, and subsequently nearly 70 billion more will be coordinated, bringing the two amounts together to over 110 billion. I don't know if this guy is raising a hen that lays golden eggs, or if this fellow can shit golden eggs himself? Zhuhai's total fiscal revenue for the entire last year was only 49.4 billion, meaning that just for Huafa, more than two years of Zhuhai's fiscal revenue will be dumped into it. What does this show? It shows that the pressure is long past the Zhuhai municipal level. Even if you pack up and sell the entire Zhuhai municipal government right now, it wouldn't sell for over 110 billion, would it? So where did the money come from? Everyone should ponder this matter, right? The money either came from Guangdong Province, or from the central government, or it's the old trick: borrowing new debt to pay old debt, circular debt, and finally making the central bank print money. And Huafa's lifeline is not just Huafa's own problem. What is the root problem of Huafa? Half its body is in local government financing vehicles (LGFVs), and the other half is in real estate. Local state-owned LGFVs across the country are basically this way; Huafa just blew up first, but behind it is an entire structural problem.

Then came October 30, the last trading day of the month. During the transition, money was already tight in the interbank market, the bond market had been rising all the way from the beginning of the year to historical lows in yield, and on the stock market side, the Shanghai Composite Index suffered a plunge within a week. With several events colliding like this, Huafa's pebble triggered a panicky stampede across the entire market. The sequence of this stampede is particularly worth mentioning: what happened first? First, wealth management subsidiaries made preventive redemptions of the bond funds they held. Once bond funds are redeemed, they have to pay out cash, so at this point bond funds can only sell the things they hold that are easiest to sell. In the Chinese Communist Party's fake financial market today, what kind of asset has the strongest liquidity? Government bonds and major banks' tier-2 capital bonds and perpetual bonds; the central bank only recognizes these things now. What are tier-2 capital bonds? They are tier-2 capital bonds and perpetual bonds issued by banks—to put it bluntly, bonds issued by banks when replenishing their own capital. Whoever buys this stuff is padding the capital for the bank. On that day, the declines of various assets clearly wrote out this sequence. The yield on 10-year government bonds rose by 2.7 basis points, 3-year AA+ medium-term notes rose by 5.2 basis points, 3-year tier-2 capital bonds rose by 7.5 basis points, and weak-credit long-term LGFV bonds rose by a full 15 basis points. What do these sets of numbers mean? It means that interest-rate bonds were just treated as a temporary ATM and sold off along the way, while what was truly repriced was credit, and the worse the credit, the harder it fell. But the most unexpected thing came later. This bond disaster lasted for only a little over three trading days, because if bond volatility like this continued for even another half month or a month, it would have shaken the fragile body of China's finance to dizziness. Then the central bank of the Chinese Communist Party urgently released a round of liquidity. On November 4, the yield on 10-year government bonds began to resume its downward trend, and along the way, it even hit a historical low. What does this show? It shows that from a market perspective, credit as a thing should have been repriced in the first place. But this reassessment had just begun when it was forcefully shoved back down by the Chinese Communist Party using administrative power. How was it forced down? The central bank made consecutive four-day overnight reverse repos of 1 trillion each, and the funds of over 100 billion put out by Zhuhai to rescue Huafa—this pit was not leveled by the market at all, it was flattened by force.

So the question arises: why could a hole that was filled in three days cause over 150 million people to feel pain like this? The answer lies inside the underlying assets of R2 wealth management products. Let us strip open the asset side of R2 wealth management right now and see what kind of garbage is in there! Inside R2, credit bonds amount to 14 trillion, while interest-rate bonds are only 0.93 trillion. What kind of concept is this? It means you thought you were buying a government bond fund, but you were actually buying a credit bond fund. And what the fuck is inside those credit bond funds? They are packed with fucking local government financing vehicle (LGFV) bonds, bank tier-2 capital bonds, and various corporate bonds. Government bonds don't even account for a fraction of a percent. Furthermore, nearly 3 trillion of this consists of public funds that bank wealth management products used your money to buy, with the bulk still being bond funds. In the first nine months of this year alone, this amount surged by 1.14 trillion. Why do this? Because on their own books, bank wealth management arms do not dare to buy long-term bonds directly. What are they afraid of? They are afraid of extending the duration of the entire asset structure. Consequently, this bunch of bankers accumulated and outsourced this long-term risk to bond funds. As a result, by October 30, the average duration of bond funds across the entire market soared directly to 2.97 years, hitting the extreme 99.8th percentile level of the past two years. In other words, this was almost the longest duration seen in the past two years. To put it more bluntly, the short and stable structure that wealth management companies showed you on their books was all fucking acting. Because the fluctuation risk of long-term bonds was completely fucking dumped onto those public funds. Now, this tier of bond funds has also collapsed to its limit, which is why on October 30, it was this layer that got dumped on first. People might wonder why wealth management positions were squeezed into this shape. It is because both ends were crushed down to the floor. Let us look at the data: on the liability side for banks, the posted interest rate for one-year time deposits at state-owned mega-banks dropped all the way from 0.45 percent in July 2024 to 0.95 percent by May of last year, and demand deposits are even more fucked, leaving only 0.05 percent, which can only be described as better than nothing. Time deposits of under one year have all entered the zero range; money was squeezed out just like this. In the first three quarters of this year, household deposits grew by 3.34 trillion less than the same period last year. A considerable portion of this money flowed into wealth management, while another portion flowed into the stock market. On the asset side, the yields on assets that wealth management products can buy have also collapsed. In September of this year, the issuance spread of 5-year AA+ LGFV bonds was only 47 basis points, hitting a historical low. Meanwhile, the spread of tier-2 capital bonds over ordinary medium-term notes has been squeezed to zero. In other words, this bunch of idiots in the Chinese Communist Party has squeezed bank tier-2 capital bonds down to the same yield level as government bonds, while simultaneously pulling LGFVs—the champions of junk assets—to a spread of less than 47 basis points compared to government bonds. Ridiculous, right? Given the credit of Chengdu right now, to put it bluntly and crudely, using this bunch of motherfuckers' credit to unlock a fucking shared bicycle would be a struggle. Seriously, I wouldn't even borrow a power bank from them. But even so, the spread with government bonds is less than 0.5 percent. With the yield spread gone and the liquidity premium gone as well, all that remains is crowding. So how can these wealth management subsidiaries still cobble together this kind of yield? You tell me! Should they buy even worse bonds to earn a slightly higher interest rate? But high-interest LGFV bonds are currently being replaced batch by batch, and banks nowadays dare not touch these garbage bonds on the market either—as can be seen from the fact that Huafa's surface-level loan extensions cannot even be sorted out. What about borrowing money to add leverage and buying more long-term bonds? Can their capital withstand it? That is one aspect. If you buy long-term bonds, the duration structure of the banks will be stretched longer and longer. Therefore, only one path remains: since they do not dare to buy long-term bonds themselves, they hand the money over to bond funds, letting the funds buy these long-term bonds on their behalf, and hanging the duration risk on the funds' books. This is the origin of this 2.97 years.

Alright, speaking of this, you might ask, it's not the first time the bond market has fallen; there were adjustments in 2024 and last year as well. Why was it that the net asset value (NAV) of wealth management products could remain rock-steady before, but now it has fallen into such a fucking mess? Because previously, wealth management subsidiaries had a whole set of 'USD filters,' and now, this fucking filter doesn't work anymore. Just after the redemption wave in November 2022, the wealth management industry invented a few techniques. Hey, let me tell you, these techniques are very interesting. The first one is called 'smoothing trust.' What does this mean? Simply put, wealth management products obtain these bonds through trust plans, and what is the role of the trust? It is to artificially design a performance benchmark, say 2%. When the actual return exceeds 2%, the excess is deducted and kept in the trust. Why deduct it? To release it and make up for it when the return is less than 2% someday. In this way, the NAV curve is flattened; this is artificially flattened. Another one is called 'closing price valuation.' In the Shanghai Stock Exchange, there is a batch of private placement bonds that nobody cares about, nobody buys or sells, and there is no real transaction price. Anyway, the closing price is always hung at 100 yuan. Wealth management subsidiaries calculate the NAV based on this 100 yuan. Where the bond actually falls to? They don't care at all. It's equivalent to accounting at cost, adding interest every day, and the NAV just rises steadily because you can't see any price fluctuation process. There is also 'self-built valuation models.' This path is even more fucking wild. The wealth management subsidiary doesn't recognize the ChinaBond valuation. How do they value it? They fucking price the perpetual bonds themselves and calculate a number. This is very crude; they just take the average transaction price of the past six months as today's price. This leads to the fact that no matter how much the bond falls today, you can't see a single bit of it in the NAV. And what is the ChinaBond valuation? It is the reference price set daily for a bond by the China Central Depository & Clearing Co., Ltd. But wealth management subsidiaries don't even bother with the reference price given by the CCP. Originally, it was required that wealth management companies must calculate the NAV according to this price, but wealth management subsidiaries just don't use it, all for the sake of letting everyone see that smoothed-out curve. Then in December 2024, even the CCP's own regulatory departments didn't know how large the actual scale of the entire wealth management industry was. The regulatory departments started issuing notices to these wealth management companies, banning all 'closing price valuation,' 'smoothing valuation,' and 'self-built valuation models.' This isn't because the regulators want to control the risk; it's because the regulators themselves are fucking completely confused. How many holes are hidden under the 30 trillion yuan of wealth management products? Even the CCP itself can't see clearly, so they can only tear off the filters all at once and let the real prices be exposed. At least let me have an idea of how big the bomb is. And what you see is that in March this year, wealth management subsidiaries collectively wrote the first letter, continued to write one in July, another in August, and another this month—four letters in one year. What does this mean? It's not that the underlying assets have become more dangerous; it's that the risk has always been there. What has changed is that those few layers of filters between the assets and the retail investors are gone. Since then, every basis point of credit spread has, for the first time, hit the faces of those without pricing power in the form of daily pressure. In other words, everyone can now see its fluctuation process.

Alright, with the accounts calculated up to here, we should calculate the biggest account: how does this machine actually operate? Who is treating, and who is paying the bill? The entrance to this machine is this fucking fiscal debt resolution. In 2024, didn't the CCP hold an entertainment event called the 6 trillion yuan replacement bond? What the hell is a replacement bond? This thing is actually not high-end at all; simply put, it is using the Ministry of Finance's credit to replace local government credit, just to lower the cost a little bit. So who is the main buyer? Of course, it's the banks. And what money do banks use to buy? They have to use deposits. So, let's look at this ledger. At this point, if banks buy 1.6% government bonds and 1.97% interest rate replacement bonds, then if deposit interest rates are not lowered, what will happen to the interest spread? It will be completely gone. In the second quarter of this year, the net interest margin of Chinese commercial banks was only about 1.3%. At this point, whether to further suppress deposit costs is no longer a multiple-choice question; it's the only thing they can do.

Therefore, the cost of deposits must be suppressed to below 1%, which is where the 0.95% figure comes from. So, what has this situation turned into? It means that the interest rate spread of banks and the interest rate reduction and rollover for local governments are no longer two separate things; they are simply two accounts for the same thing. Once deposit interest rates are smashed to the floor, risk-averse ordinary people have to move their money from fixed deposits into wealth management products (WMPs). What do WMPs buy with this money? They buy everything that the banks themselves do not want to keep on their books. Why don't the banks want to hold them? Because if these assets were on the bank's books, they would have to be marked to market every day, and if the value dropped, the loss would have to be exposed. But once sold to WMPs, well, the accounts don't have to be exposed, and the value can be whatever the bank says it is. What kind of stuff are they buying? It is exactly what I just mentioned: credit bonds and the banks' own 'Tier 2 capital bonds' and 'perpetual bonds'—all this stuff. In the category of Tier 2 capital bonds and perpetual bonds alone, WMPs net purchased 386.5 billion yuan from the market last year, along with interbank certificates of deposit and nearly 3 trillion yuan in other bonds.

So, do you see it now? The money of ordinary people moved from deposits into WMPs, but it never left the banking system; it just moved from the 'deposit' column on the bank's books to the list of bank capital instruments and credit asset holders. Moreover, after moving over, it is calculated at market value every day. At the same time, this debt resolution process has severely distorted China's interest rate levels; risk premiums have been completely suppressed, interest rate spreads have been pushed to historical lows, and durations have been stretched to historical highs. This has created a situation where the entire system is extremely fragile. Just that one trust default by Huafa, involving over a billion yuan, was enough to cause the entire market's bond ETFs to fall across the board within four trading days, letting 150 million people see exactly how their accounts were shrinking. Then the most dramatic scene unfolded: state-owned enterprise (SOE) defaults, government bailouts, and retail investors bearing the losses themselves all happened in the same week. Then came the announcement from the Zhuhai government that it would use over 100 billion yuan to save Huafa. From the moment the trust default was exposed to the time the Zhuhai state-owned assets stepped in to save it with 70 billion—no, 110 billion yuan—it only took nine days.

And the People's Bank of China (PBOC), on October 26th—the very same day the Huafa news was exposed—established a new tool called the 'Bond Market Non-Bank Large-Scale Redemption Swap Facility.' To put it bluntly, when WMP subsidiaries and fund companies face redemptions, they can use central bank bills to borrow money. In other words, they can buy back the bonds they were forced to sell. Whose money is being used? It is the central bank's money. Therefore, everyone saw that from October 27th to October 30th, for four consecutive days, the central bank injected 1 trillion yuan in overnight reverse repos at the maximum limit. Then, 150 million WMP investors received their fourth letter of the year. Will this round turn into a large-scale redemption wave like the one in October 2022? You must understand that the WMP redemption cycle is also a spiral. Let me briefly introduce this mechanism to you. First, after a credit shock, institutions are immediately forced to reduce their positions. Institutional position reduction means selling bonds.

Once they sell bonds like this, it immediately lowers the net asset value (NAV), and this NAV is transmitted to retail investors through the weekly updates on their apps. What will retail investors do at this point? They will redeem their WMPs, and the WMPs will be forced to dump these credit bonds directly, causing interest rate spreads to widen. Once the 'break-the-net' rate (the percentage of products falling below par value) crosses a threshold, the redemptions will continuously reinforce themselves in this self-strengthening process. How much shock did this spiral cause in November 2022? First, the 10-year Treasury bond yield rose by 22 basis points in four weeks, the WMP break-the-net rate reached 21% by the end of December, and the entire WMP scale shrank by over 2 trillion yuan in the first quarter. The central bank didn't start cutting the reserve requirement ratio (RRR) until October 25th, a full two weeks after the stampede began. But this year, the cycle has only reached the stage where retail investors can see losses; the 10-year Treasury yield has only risen by 2.7 basis points, and the central bank has already injected 1 trillion yuan in overnight reverse repos for four consecutive days. This is the reason why the CCP's central bank abandoned the original 7-day interest rate and switched to overnight 'big hair' (massive liquidity).

Because this financial system, which is more fragile than a crispy snack, simply cannot fucking withstand a 7-day duration. Why didn't it collapse this time? Well, there are a few reasons, and none of them are to the credit of the WMP subsidiaries. What is the situation now? It is that the entire financial firewall is gone, or if you compare this financial system to a house, the CCP's financial system has 'hidden fires' burning everywhere. After the CCP's central bank replaced the 7-day interest rate anchor with an overnight one, it is equivalent to always carrying a fire extinguisher, crouching there, watching which place has a tendency to flare up, and then rushing over to spray it. Secondly, the CCP's central bank has realized that the hidden fire has already reached the core targets—the SOEs. The hole at Huafa was suppressed within nine days by the Zhuhai State-owned Assets Supervision and Administration Commission using money from who knows where—that 70 billion yuan—so the credit event did not spread into a credit restructuring, but one thing has changed.

What was 2022? In 2022, retail investors ran first. This year, the wealth management subsidiaries themselves ran away first, and the entire duration structure was even outsourced to bond funds, pushing the entire duration structure to its absolute limit. What is the biggest side effect of this kind of procrastination? It is that the next time a credit event shock hits, the shock at the institutional layer will only be fiercer and more concentrated. Whether the retail redemption step can hold depends on whether the central bank can rescue the market ahead of time every time, and whether the next hole can also be suppressed within nine days. Finally, let us take a glance at these letters from the wealth management subsidiaries to see how this smoldering fire still has to burn. I ranked the high-frequency words in these letters. Look at their ranking of usage, from highest to lowest: short-term disturbance, emotional release, waiting for stability, anchoring on coupon yields, lengthening duration, fundamentals have not changed, and viewing rationally.

Leaving aside the cushion of coupon yields for a moment, what is the underlying yield of R2 pure bond products now? AAA-rated three-year urban investment bonds are 1.73%, and perpetual bonds and medium-term notes are similar, with gross yields of only around two points. After deducting management, custody, and sales fees, the take-home yield for a year is only between 1.5% and 1.6%, which translates to making only 0.4 basis points per day—earning 4 yuan a day on 100,000 yuan. As a result, dropping 6 basis points in a single day requires more than two weeks of interest to fill the gap. If the retracement is 3 basis points, it will take more than two months to recover. The premise is that interest rates are not allowed to bounce upward by even a single basis point over those two months. If there is another 1.5% retracement like the one in 2022, your coupon yield cushion will have to pad for a whole fucking year, because the credit coupon yields in 2022 still had 3%, yet they still failed to cushion the fall back then. Therefore, translating the phrase anchoring on coupon yields in a 2% world means what?

It means I am sorry, wealth management clients. As the saying goes, better you die than I, so don't blame me for outsourcing the 97 to bond funds. If you are lucky, you might get your money back by waiting another two months; if you are unlucky, well, anyway, the money and time are yours, not our bank's. That is the exact meaning. Furthermore, regarding lengthening the 97, this time the ones that dropped are products with the shortest holding periods of around fourteen days, as well as products like the Banianbao with holding periods of around one hundred and eighty days. The selling point of such products is that they are liquid cash to be used and withdrawn at will. Now using lengthening the holding period to explain losses is equivalent to pacifying clients with the exact opposite of the product design. Finally, look at the ghost products recommended in these letters, such as the damn broad-based index thrown out by Minsheng Wealth, alongside dumbbell strategies and quantitative CTAs—a bunch of metaphysical jargon. I don't believe retail investors can understand what these fuckers are talking about. Minsheng simply let go, truly let go, spouting nonsense and directly duping retail investors into buying fucking mixed funds. This is not a pacification letter; it is clearly a product promotion sales pitch, and all it pushes are high-risk products beyond R2. Isn't that fucking vicious?

Why? Because once the filter is removed, the low-volatility and stable product line has already fucking reached its end. Securities firms are already saying that this wealth management yield is impossible to outperform five-year fixed deposits, leaving wealth management companies with no choice but to continue tricking you into buying stock-backed products. However, the two rounds of breaking below net asset value in July and August of this year happened to converge on this exact bullshit, driving stability-seeking R2 clients into high-risk R3 products. This is not solving volatility at all; it is pushing you directly from the pit of the bond market into the crematorium of the stock market. So what is the conclusion of this matter? The R2 wealth management retracement at the beginning of this month superficially appeared to be just a capital flash crash triggered by the overdue Zhuhai Huafa trust, which was quelled in less than four days. But at its core, it was the first time this machine, which has been running for two years, hard-dogged a thunder-explosion shock under real conditions. The entrance is pressing deposits down to the floor price, making banks buy bonds to protect the interest rate spread; the middle section is driving squeezed-out deposits into wealth management to act as a接盘 (bag-holder) for credit bonds that banks are unwilling to buy at high prices; the exit is state-owned enterprise thunder-explosions being bailed out by local state-owned capital, public finance, and the central bank, while the low-price losses are left for over 150 million retail investors to foot the bill for.

This time, the retail investor redemption step was not ignited. What did it rely on? It relied on the central bank of the Chinese Communist Party frantically patrolling the entrance with a fire extinguisher. You are counting the financial system by the day now, so it is not any reason written in the letters of the wealth management subsidiaries. Moreover, everyone should think about this: if a single Zhuhai Huafa can barely hold on, can China still hold on if several explode at the same time? That is the real question, isn't it? So, as I said before, you must stay really far away from these fucking Chinese wealth managements. To put it bluntly, the CCP itself has no fucking bottom line in its heart right now, otherwise who the hell would treat overnight interest rates like their own hair? Alright, that is enough chatting with everyone today. If you like the program, please click the order button below. If you want to support me, you can join the universal access channel. Every quarterly in-depth program on the universal access channel welcomes good people's accomplices. See you in the next episode.