Why China’s banks are dumping properties to survive a cash flow meltdown

So let me give this conclusion directly. It is that China's big six stateowned banks as well as the smaller joint stock banks and the large rural commercial banks all of them are already in a state of real and severe loss. Their cash flow is in reality already broken and in any normal country they would have gone bankrupt long ago. In China they're surviving only because everything is tightly controlled from the top. Um, before I go through the numbers, I'd like to sum up China's banking crisis by giving you an example. Here's the example. Imagine a restaurant that brings in $1 million a month, but spends 1.5 million. That means it's losing half million in cash every month. Obviously, it can survive. Um, but the owner came up with two strategies to stay afloat. First, he borrows 300,000 from relatives. Second, he sells prepaid restaurant cards to customers, offering discounts to get people to put money into the store. So, a group of customers end up buy $200,000 worth of prepaid cards. And these prepaid cards are essentially debt. The restaurant owes me later. So together those two inflows which add up to $500 thou $500,000 isn't enough to plug uh the month's cash deficit but the next month the business has the same problem all over again. um if it doesn't control cost or if it it's not able to bring in more customers and then it will need to borrow more attract more prepaid customers and trying to borrow more money to meet the earlier obligations. So this cycle forces the business deeper into a debt hole. Eventually the debt will become unpayable and the restaurant will go under. So this example is everywhere in real life in China. Now the the idea is that 500,000 uh in my case dollars but in China's case UN a 500,000 UN loss is a real 500,000 UN loss. Borrowing or taking deposits does not fix the business model. It only delays the collapse. That's essentially what's been happening in China's banks. So on paper it looks like it has enough cash flow but how much of that is borrowed or deposits from customers? We need to calculate the bank's true operating cash flow to understand how deep the hole really is. So take a look at this cash flow statement from the Bank of China. The sections I highlighted in green shaded in green represents Bank of China's actual operating income. So they're cash from interest, fees, commissions and other operating activities. So for banks, true revenue comes from lending, earning interest and charging fees for transfers, settlements and advisory services. Other cash inflows, they're only um deposits coming in or loans from the central bank or other financial institutions. So technically those count as operating cash inflow under accounting rules, but just like the restaurant example I gave you, they're not real operating cash inflows. They only mass the problem and eventually make the cash the cash crunch worse. So take a look at the red boxes, right? Bank of China's customer deposits increased by 995 billion yen. So near nearly 1 trillion yen in the first half of the year. Um borrowing from central bank increased by another 423 billion yen. So these inflows are gigantic and they seem to strengthen cash flow but again they're not real cash flow generated by business by business income like the example I gave. They are other people's money. So we should not in include them when we calculate true operating performance. And on the expense side, the categories mar uh are marked in pink. Their real operating expenses, interest paid, fees and commissions paid, staff compensation, taxes, and other operating costs. So using these definitions, um this Chinese analyst pulled the true operating cash flow data for all six major state-owned banks from 2018 to the first half of this year. And what the table shows is very interesting. Take a look at the circled line at the bottom for the first half of this year. If you look carefully, if it's red, it means the bank had negative cash inflow. If it's black, if it's in the black, that means it's a positive net operating cash flow. So out of the six gigantic banks, um, only one, only Bank of China still had a slightly positive net operating cash flow, which is about 10 billion yuan. The other five are all deeply negative. In the first half alone, in the first half of the year alone, um ICBC, uh the world's largest bank lost 103 billion yuan in real operating cash flow. And then um China construction bank lost 91 billion. These are catastrophic numbers. You may notice something odd because I also compared uh the first half of 2024. It's the last line in the spreadsheet. ICBC had negative cash flow of 59 billion in the first half of 2024, but its fullear number turned positive at 143 billion. So yeah, so the first half of 2024 was a uh a negative cash flow of 59, but the whole year was a positive 143. So why? Well, because the bank's biggest expense is deposit interest. So to reduce losses, bank Chinese banks started slashing deposit rates. Um I believe I believe it was on July 25th last year. They cut rates um and then they cut it again on October 18th and then again in May this year. So as a result the interest rate on demand deposit fell from 2% to 0.05%. Basically it's zero. It's not even 1%. It went from 02% to 0.05%. And when your fixed deposits dropped from 1.45% to a little under 1% 95%. But even these aggressive rate cuts couldn't stop the bleeding. The six major banks are below or barely at the survival line and there's no path back. So now let's do something interesting. Let's combine all six banks into one hypothetical mega bank. And when you do that, the trend becomes even clearer. Um, yeah, this is bigger. Uh, the combined net operating cash flow peaked at 1.432 trillion in 2020. As the real estate bubble bust or burst, the number plunged, falling to 777 billion in 2023, then to 391 billion in 2024, and then it turned red, right? And then it turned to negative in the first half of this year. So, you see the downward trend continued from the positive to a negative. Now, deposit rates can be cut much further. they're already at near zero levels. So, people will simply withdraw their money, buy other assets like gold or keep cash at home because at least they have the money under their pillow. There's no point of keeping the money in the bank because one, you're not earning interest. Two, you have the risk of not take not being able to take them out. So, that will trigger bank runs. And if one bank cuts rates while others don't, you will see a classic prisoners dilemma. You know, I cut rates and lose deposits, you raise rates and take my deposits away, forcing me into bankruptcy. We've already seen early signs of these vicious competition happening. What does that tell us? Well, the banks have run out of moves. All they can do is wait for the cash to dry up. Now to go further, the analyst also pulled data for the three joint stock banks. They are regional banks. But there's there's there also the large banks in China. Um Shanghai Pong Development Bank, Puing Ping Bank and China Ming Bank. Their cash flow deficits are also massive. SPD lost almost 34 billion yen in the first half of the year. Pingan lost 14 billion and Ming lost 1 billion. Okay. Next, let's look at two major rural commercial banks. So, they are the Shanghai Rural Commercial Bank and Chongqing Rural Commercial Bank. Uh they're the better performing ones. They're smaller banks, but their numbers are worse. In 2024, they both had negative cash flow, losing 400 million and 600 million, respectively. Uh you probably can't tell cuz I rounded them off. And then in 2025, their losses ballooned to uh nearly 1 billion and 6.2 billion. Now, rural commercial banks have a very thin capital buffers. They simply can't survive ongoing cash flow deficits. If either one collapsed tomorrow, people wouldn't be surprised. And then let's do something that's interesting. Let's treat all these 11 banks as one single bank because they vary greatly in size. Let's adjust the numbers by weighting them. So here's the weight that this financial analyst assigned. So 60% for the big six, 30% for the joint stock banks, and 10% for the rural banks. When weighted this way, their combined operating cash flow peaked at 942 billion yuan in 2020, struggled downward to 512 billion in 2023, fell to 339 billion last year, and finally sank to negative territory in the first half of this year. So remember, these 11 banks are the strongest in their respective banking sector. If even they can generate positive operating cash flow, the rest of the banking system must be in worse shape. So that means one thing. China's banking industry is losing money and liquidity. Banks rely heavily on cash flow once real operating cash turns negative. They collapse faster than almost any other type of business. Uh and counting on central bank to print money to rescue the entire system is unrealistic. Like I showed you last Thursday, the People's Bank of China has already spent the last 12 months quietly absorbing over six trillion yen of government bonds to prevent a sovereign debt meltdown. So trying to support a banking system with over 400 trillion UN in assets will require unimaginable amounts of freshly printed money. So people can't even begin to estimate the scale. And that is the situation China's economy faces today. And what are the banks going to do to survive? Well, they're selling collaterals for cash. Um, China's banks are now selling homes, too. Recently, large state-owned banks like Agriculture Bank of China, China Construction Bank and Bank of Communications along with city commercial banks and rural commercial banks across the country have been listing properties in bulk on JD.com, Alibaba's uh judicial auction platforms, and other asset disposable sites. These listings cover everything. Apartments, office buildings, retail spaces, even factories. They have everything there. Think about it. In just a few years, banks have gone from being the financial big bosses with trillions in lending power to becoming reluctant landlords, taking over failed collateral, and now into desperate sellers trying to turn those assets back into cash. You see a lot of the regional banks like uh Lanjo Banking Bank, Tenzin Bank, uh Dalian Bank, you know, all these municipal banks, Harbing Bank, they're all selling. And then the big stateowned banks are also selling. But compared with the share volume listed by the local banks, their numbers looked small. In some provinces, the rural the rural credit cooperatives have listed thousands even tens of thousands of properties for sale. Now, one thing stands out immediately. Bank sold properties are cheap. They are 20 to 30% below market price, sometimes even more. So, why are banks willing to take such losses just to dump these assets? The both mortgage defaults and business loan defaults are rising while real estate prices are falling. That means the collateral mainly property is piling up inside the banking system and their values are quickly falling. And also it takes forever to go through the auction, the traditional judicial auctions. It takes too long. It takes two years and it's clogged right now because of the sheer volume. And so the banks are being forced to find faster liquidation channels and so doing it themselves is simply more efficient. So would it work? Because in a sluggish market buyers are there just there there are just no buyers and so failed auctions are becoming the norm. So for example, uh many Landro Bank properties have been listed more than 10 times, meaning that they failed to sell as an auction 10 times already. But bank selling properties is not a strategy. It's a sign. It's a sign that liquidity is seriously uh an issue and and also confidence is fading. So what comes next will depend on how long the system can hold and how far Beijing is willing to go to keep it