Breacking: China Is Bailing Out Its Entire Financial System

The Chinese are going to be using cigarettes to help bail out the country's banks and more importantly insurance companies and yes that's a sentence I never thought I would say and no it is not a joke. They are using tobacco and tobacco proceeds to help recapitalize some of the largest banks and some of the larger insurance companies because China is a mess and it's getting bigger and it is September which means it's also bazooka season over there. The past bazookas haven't worked they haven't fired the way that everybody expected at least everybody in the mainstream expected so China is left with few really good really really decent options or really realistic options so heading along on their bank recapitalization plan though they're running into budgetary constraint there's a lot to get into here. So what was reported this past weekend is that the Chinese are going to inject the equivalent of 45 billion dollars into some of its largest banks to as the mainstream in the west says boost growth that's it's not about boosting growth it's about the fact that the Chinese are in a low income trap low interest rate trap and there are tons of hidden loans hidden bad loans on the Chinese bank balance sheets and as we're really going to focus on here insurance companies too though we'll get to that in just a second. So you know the mainstream idea is that this is more stimulus when it's not really stimulus because it doesn't actually stimulate but also from the Chinese bank Chinese government's perspective this is hey the situation continues to get worse the economy continues to decelerate beyond where everybody thought it would the banking sector as we've been talking about recently and reported in a video not long ago lending contracted in July with the most on record and yes July is not a big month for credit but it isn't just July especially when you see some of the statistics we'll go over here household lending is in substantial retreat so they got to do something like I said September is bazooka season so here comes the latest bazooka kind of just continuing on the past ones it's not really about boosting growth as it is trying to arrest the slide before it gets to be something more and more dangerous and before we get to that too I want to make something perfectly clear as well whenever you talk about the downside in China people hear either one or two things there's a China bulls who say that China is eating everybody's lunch this is going to be the century of the Chinese they're the dragon with a thousand year perspective and everybody here has short intention spans and China's just going to beat everybody to the punch that ain't happening by a long shot nor is the other side the other side is okay if China is not going to dominate that must mean that China is going to utterly collapse and so anybody who talks about a downside in China what they mean is that the government's going to fall the Chinese economy is going to completely drop in the entire system the entire country is going to fall completely apart that's not what we're saying either what we're saying is that the Chinese situation is increasingly difficult which is leading to further and further downside in the banking sector as well as in the real economy in fact those two things are now combined which is the reason why we're talking about cigarettes here and cigarette investments so the downside in China isn't complete and utter collapse it is economic growth that continues to fall off largely due and feeding into a banking crisis that is slowly smoldering beneath the surface and this is one of the pieces of confirmation that tells you that's getting serious because the Chinese continue to have to throw money at the banking sector and now insurance companies so what they announced was they're going to help recapitalize eight institutions including Industrial Commercial Bank of China Agricultural Bank of China and a couple other ones we'll get to in just a second these are the big banks a lot of the loans are held by the smaller medium-sized banks so again it's more about hey let's get the big bank capitalized so that we can maybe have them operate as a bad bank as a potential cleanup mechanism but also the big banks are stuffed with a whole bunch of bad bad bad debts as well and therefore they can use a little bit of extra capital to make sure they maintain their extra maintain enough cushions so that doesn't lead from a credit crisis in the banking sector to something like a liquidity crisis which is not a huge probability but it's also a non-zero probability so the raising money you see 300 billion dollars reported by Bloomberg coming from the Ministry of Finance as the government contribution leaving about 60 billion not dollars 300 billion yuan 360 billion yuan for from all sources with 60 billion left over a lot of it's coming from China's National Tobacco Corporation which actually makes more sense than it may seem China National Tobacco is one of the most profitable companies not just in not just in China not just in tobacco but maybe potentially maybe the most profitable company on planet earth China has a massive smoking problems there are something like 300 million to maybe 400 million active smokers in China which is absolutely enormous and they continue to smoke despite the rest of the world or at least large parts of the rest of the world turning their backs on cigarettes going toward toward vapes and other other forms of smoking alternatives so the Chinese tobacco monopoly the state-owned system or the state-owned company has loads of funds now the Chinese have been increasingly careful and increasingly wary of their own fiscal situation which is one reason why they've cracked down on tax cheats or tax avoidance from the ultra wealthy which is a different story that I've written about in our deep dive analysis at Eurodollar University but in many ways they also want to be careful about how much money they how much money they're borrowing through these special financing bonds and then using for various proceeds in various different ways such as recapitalizing the banking system so it's not it's not a very big leap that they would go knock on the door of China Tobacco and say hey you know you're killing a lot of our Chinese citizens here we need some of those some of the money that you've been squirreling away from your huge proceeds and profits to help out over the banking sector over here maybe we can help clean up the real estate mess and keep everything relatively stable before it actually gets into some real downside probability so this is not a huge connection China Tobacco has lots of money lots of profitability it can certainly afford to help out the Chinese government in its latest bank recapitalization scheme which is as I said not no longer just a bank recapitalization scheme this is maybe the most important development here notice the names at the bottom of the list China Life Insurance China Taiping Insurance and China Reinsurance not huge amounts but the fact that some of the biggest insurance companies in China are on this list and are receiving capital suggests that China is aware that there is an insurance company problem too not just bad loans among banks but also potential trouble hidden in the balance sheets of insurance companies and where have we heard that before reaching for yield may not be strictly a U.S. or European phenomenon reaching for yield and taking huge risks might also have been taking place in China now the standard explanation here is that China is recapitalizing insurance companies because interest rates are falling therefore the potential safe the potential returns nominal returns on safe assets continue to drop which means China's interest coverage on its future lobby obligations is dropping as well and therefore I need a little bit of recapitalization just strictly is because of oh this is just about interest rates this is not about you know over this is not about bad loans hidden on insurance company portfolios except last week the financial regulator in China rewrote some of the 1995 or rewrote some of the ancient law really ancient laws for the first time since 1995 that tightened the the scrutiny of shareholder interests imposed higher minimum capital thresholds it basically suggests that regulators they fine tuned some of the regulations because they maybe it sounds like they uncovered some behavior that sounds a hell of a lot like what we've been talking about here in private credit and private equity and insurance companies buried in Cayman Islands subsidiaries of insurance company asset managers that are buried in subsidiaries of insurance companies subsidiaries in the Cayman Islands so risk-taking behavior it's not a big big leap from reaching for yield taking on more risk than was maybe prudent and necessary given the Chinese economic situation and financial situation that maybe now the insurance company portfolios are falling under suspicion and scrutiny at least from the regulatory level because of some bubbly bad cockroach garbage type of lending behavior that maybe had been taking place over the insurance business because let's face it over in China the economy there like I said continues to get worse and Chinese insurance companies maybe not as much as Japanese but they still have lots of obligations they'll they still have tremendous needs to generate returns and interest rates in China have not just been falling for the last two years they have been falling for 15 years so as interest rates continue to go down for fundamental reasons not policy reasons fundamental reasons it leads toward what a lot of people used to call the zero rate trap where financial firms with lower interest rates can't really well I'll get into this in just a second let's let's talk about insurance companies here the fact that the Chinese announced that they're going to recapitalize insurance companies as well as banks not a positive sign this is not stimulus this is not like 2024 when everybody in the western media went nuts over the big bazooka this is sort of like oh crap they have to do this again and now they're going to do it for insurance companies this is not actually a good sign so despite the fact that this was supposed to be a big stimulus push instead what you saw is that the market reaction at least the stock market reaction in China was somewhat negative it wasn't positive it certainly wasn't September 2024 it was sort of like oh they have to continue to bail out the banking sector now they're going to start bailing out some of the bigger insurance companies this doesn't sound very positive at all because in reality it is not positive at all this is again another sign that things are deteriorating or things are getting serious in China which is what we've been talking about this entire time the more they feel they have to do the worse that you know it is and the more they feel they have to do the same things that they've done before the more you know they didn't work before and that they still have a lot to do because the situation is not improving and not not progressing and you might remember we went through this last year last year before not quite bazooka season this was actually before we got to bazooka season around tariff season the early part of last year around the springtime the Chinese government as they had announced in September 2024 as part of the bazooka package they borrowed a bunch of money in the bond market took that money and recapitalized I'm using air quotes here recapitalized Chinese banks only banks at the time and obviously that didn't work because here they are doing again plus we know from the Chinese banking statistics just how successful that recapitalization and all the stimulus has been because like I mentioned up at the top here China lending in China loan flows in July according to total social financing biggest contraction on record so this isn't stimulus this is hey let's try to recapitalize the banks insurance companies to try to stabilize lending and credit and debt throughout the Chinese system because it continues to go in the wrong direction it gets worse not better and the worse it gets the more the government has to do which is the proper way to think about stimulus it doesn't stimulate it is a reaction to problems that are already taking place and problems that have gotten be so serious that even government bureaucrats and economists and occasionally central bankers are reacting to it and the loan data in China is just it's getting to be pretty grim if not downright scary which again goes back to why are they recapitalizing banks and insurance companies because debt is no longer is nowhere near trend it fell off trend in 2024 thus the bazooka in late 2024 but obviously that didn't work because there was a bit of a bump in early 2025 which many people attributed to the bazookas in 2024 but it didn't last very long and by the middle of 2025 things were starting to roll over and deteriorate again not just in Chinese banking or the debt markets but also the real economy to the point that in 2026 you can see as far as lending and banking is concerned really really going in the wrong direction thus the latest bazooka genius ideas out of Beijing now we have insurance companies and it's i guarantee it's not because of just strictly interest rates but what do interest rates actually tell us interest rates are a fundamental view of growth and inflation expectations priced into a bond market thus the more concerned that the bond market and overall financial participants are about economic risks financial risks banking risk liquidity risk whatever it happens to be in China's case at least three of the four of those not liquidity risk just yet but but understanding three of the four of those are tremendous risks interest rates continue to go down so as Chinese law Chinese banks and Chinese insurance companies who lent to state-owned directives uh over the but really the stimulus that had been rolled out 20 2009 2012 again in 2016 banks and insurance companies owned a hell of a lot of that debt didn't get any better the Chinese economic situation continues to get worse therefore lower growth and inflation expectations lower growth and inflation expectations interest rates go down as you can see right here they don't stimulate lending they respond to weakness in lending and weakness in the system so rates go down which means Chinese banks get squeezed on the profit side Chinese insurance companies get squeezed on profits which makes their situation even riskier which makes Chinese banks pull back even further which makes interest rates go down even more because the bond market says well Chinese banks are pulling back that's a sign of weakness and difficulty so rates go down even further and you can see how you get into a vicious cycle rates go down profitability the banking sector goes down bad loans continue to pile up even higher rates go down even further bad loans pile up but Chinese banks profitability goes down insurance company profitability goes down they're stuck in a trap so the lower rates go the more you know it's difficult and the more difficulties it creates on the banking sector thus the latest recapitalization it's all part of one big picture that when you can interpret interest rate properly and not look at them as stimulus it all makes perfect sense and he continues to go in the wrong direction down is the wrong direction especially in the household sector I don't think people really appreciate how difficult the situation has become household sector in right up at the front Chinese banks don't want to lend and Chinese households and companies don't want to borrow now in the media all you hear about is that Chinese households there's not enough demand for loans but as we're going through here and the Chinese government obviously knows through its regulators that it's not just Chinese demand for Chinese loans that's down it's also the supply of loans but when you put those two together you look at January through July of 2026 which is the latest data we have the August statistics aren't out just yet January through July household loans have dropped by nearly a trillion yuan better than three quarters of a trillion yuan dropped contracted household lending that compares to the first seven months of last year in the aftermath of the September 24 bazooka of plus 680 billion now plus 680 billion that was alarming and concerning what concerning last year which is why they did the recapitalization and some other stimulus ideas in 2025 but from 680 billion positive to 819 billion negative big time shift between last year and this year we know exactly when it took place which was June and July of last year so huge shift in household lending and that compares to 1.25 trillion positive in 2024 which by the way was not good 1.25 trillion is what led to the bazooka in September 2024 in the first place because you go back to 2023 and it was 3.06 trillion that was somewhat inflated by the big month there that you see the huge up chart there the huge bar that's going up there which was um the reopening period there was some there's some uh some uh some lending that took place that had been delayed anyway 3.06 trillion was probably on the high side it was more a more normal or typical uh typical first half of a year first seven months of the year is around 2 trillion but anyway 3 trillion down to 1.25 trillion down to 680 billion down to minus 819 billion yeah china has a banking problem it also has a borrowing problem we already talked about i talked about this with steve on a youtube video a little while ago a couple weeks ago i think it was uh how china is already trying to bail out the property sector from the demand side you know allowing a 40-year mortgage which let's face it that's sort of a hail mary kind of a thing because a 40-year mortgage doesn't really cheapen payments all that much however what it does do is create more interest up front especially in the first several years which is sort of a small gift to the banking sector so even even here everything kind of goes back to chinese banks and chinese insurance companies and the chinese debt markets so it's not just low demand for loans it's also the unwillingness of chinese banks to lend thus the recapitalization which is not about growth it's about trying to stabilize the banking the situation in the banking sector as well as with apparently insurance companies and you can see why and how none of this has worked china's been throwing historic housing rescues out since 2024 and since june of 2023 housing prices have fallen let me say this correctly housing prices have fallen in almost every single month however housing prices according to the 70 city average in china have not posted a positive month since june of 2023 so there's been a couple zeros in there but by and large how home prices in china through most of the country there are some pockets of strength like in some of the bigger tier one cities but for most of china the chinese housing market experience has been falling prices since june of 2023 that's three years three years and how and home prices are down 11 which i mean may not sound like much it should sound like a lot but it may not sound like much especially over three years what's a couple percent a year but we're talking about home prices can you imagine home prices falling in the united states by 11 we didn't see anything like that in 2008 and 2009 not by 11 so we even though it's a longer slow drawn out process 11 dropping home prices yeah they have a serious problem in china so yes lack of demand for loans especially mortgages because you're going to want to buy a house where prices continue to fall year after year after year of course you're not going to do that now the other side of that are you uh are you going to want to lend into that into that type of environment where first of all the collateral that you're going to lend on is probably going to depreciate as you're lending but also the risks that are going that are associated with making that loan it all fits into why interest rates are low and therefore why the chinese are trying to bail out their banking and now insurance company sectors again the economic statistics the chart set shows you everything there retail sales there is a good um home prices that i just went over in fact i did a chart of this on one of a recent video last month in the middle of august here on youtube but you can see spending has almost dried up in nominal terms a tremendous amount of weakness which makes sense and it also tells you that the difficulties in the real estate sector and the banking sector are indeed spilling over into the real economies particularly consumer spending therefore weak internal demand in china really weak internal demand in china which leads to all sorts of other negative and second order consequences a fixed asset investment what's important about fixed asset investment again give a couple of things first it's part of the urgency to help stabilize the banking sector because chinese wants they want to stabilize the fixed asset investment they want to stabilize the overall economy but the second point is that fixed asset investment is not just falling in property development it's also now contracting in manufacturing as well as overall infrastructure investment from uh from various sources as well so fixed asset investment is a more urgency more of an impetus to try to stabilize the financial situation not to get china growing again but to try to remove some of that downside risk that continues to emerge here and just to be clear once again downside risk doesn't necessarily mean or even probably mean that china is going to collapse into a fiery dust of fire explosion with dust going everywhere i don't know where that metaphor came from but china's downside risk continue to not just not just risk china's downside reality continues to emerge so the goal here among authorities is to try to stabilize it so that it doesn't become a disorderly unwind and the risk of that happening goes up but all going back to the bond market it really does start with the growth the fundamentals of interest rates growth and inflation expectations the bond market is already telling you past stimulus didn't stimulate future stimulus is not going to stimulate and the more the chinese do the more the bond market hears confirmation that safety and liquidity are the right investment themes chinese banks have been getting out of risky loans and rolling into safe and liquid instruments that's why chinese bond yields are down as low as they are because the banking sector is stopping its lending activities and buying government bonds even though government bonds yield next to nothing which makes that chinese debt balance sheet trap even more binding so the lower the bond rates go the worse you know it is because think of the calculation that's being made among chinese lenders whether they be insurance companies banks or even just individuals what it tells you is that they're willing to accept basically zero nominal return or very ultra low return something less than two for safety and liquidity even though they need profits in order to clean up their balance sheet so the risk adjusted returns from other opportunities lending in the real economy must be less than two percent in other words it's very likely the chinese banks and financial firms and insurance companies are looking at the situation in china and saying the risk adjusted the perceived risk adjusted return of doing something risky is likely negative to the point that i'm willing to own a chinese five-year bond that's yielding 1.4 percent that's how pitiful the returns are but that's also a a tremendously useful commentary on the situation in china from the macroeconomy all the way down to now insurance companies insurance company portfolios and just just to throw some one one more thing in here look at how closely the copper to gold ratio tracks with at least overall chinese bond yields which actually makes sense when you understand what copper to gold is signaling and the copper to gold ratio has kind of broken out recently as copper is broken up and gold is broken out and gold has been weak which to some people suggests potentially a reflationary trade and reflationary trend that is emerging in the copper market you know demand for physical copper for ai or you know whatever else maybe china's coming back maybe the rest of the world is starting to grow again so copper prices are up however the copper to gold ratio is likely to revert back down where chinese bond yields are because there's a fundamental relationship there and copper prices are really only up because of threats of tariffs which have locked out a tremendous amount of copper outside or inside the united states and outside the hands of the rest of the global system which means it's another supply squeeze which is another signal that fits within the chinese bond yields as well as the overall situation we're describing here from the perspective of low interest rates in china which is that it makes perfect sense why the chinese would first of all be trying to recapitalize the banking sector second of all likely trying to recapitalize some of the insurance sector because of risky behavior that's increasingly dangerous and risky and likely to be seen and uncovered as risky and third why would they use tobacco proceeds because the tobacco company has tons of money and the chinese government is getting to the point where they're thinking we're doing way too much and we need to look to alternative sources to try to help us with our stimulus that doesn't actually stimulate and the market overall says is not going to stimulate going forward otherwise interest rates in china would be rising with the copper to gold ratio instead of falling against the copper to gold ratio it's not just the chinese government bond yields there's a whole bunch of other signals that are consistent with it so the copper to gold ratio is kind of off doing its own thing so chinese cigarettes are bailing out chinese banks because chinese banks are filled with bad loans in a bad economy with no way to profitably clean up their balance sheets and oh by the way it's also chinese insurance companies that are likely to be caught up in this mess too which actually makes sense given what we know about insurance companies and their penchant for reaching for yield through increasingly stupid and stupider means so china bank bailout china insurance company bailout cigarettes something you probably not didn't think you were going to hear about today but more confirmation the more they have to do the more they think they have to do the worse you know the situation is thanks for joining me i'll see you again pretty soon