China's currency totally floats freely if you ignore the $7 trillion in state bank foreign assets · Daily Briefing

In 30 seconds: Brad Setser presents detailed evidence that China continues to manage its currency through state bank foreign asset accumulation rather than direct PBOC reserves, challenging claims that the renminbi is freely floating. Bitcoin surpassed $77,800 and gold topped $4,600 per ounce as crypto rebounded sharply, with analysts highlighting the outsized importance of the market's best single days and recommending a hold strategy over market timing. US diesel and global middle distillate inventories are at historic lows, with refining margins at record highs and global exports down ~30% following the Iran War, which has severely disrupted fuel supply chains. Rising bond market pressures are prompting the US Treasury to deploy unconventional tools including doubling long-end buybacks, while analysts warn that decades of simultaneous tax cuts, entitlement growth, wars, and recession responses have put US fiscal sustainability at serious risk.

If you want to know whether China manages its currency, you could look at the PBOC fx assets. It sits at $3.4 trillion, and it has been broadly unchanged since the end of 2016. Reserves are flat for a while. Case closed: the renminbi floats freely. Except that is not where the interesting action is. The argument is that China has shifted the mechanics of currency management off the central bank's books and onto its state banks. Net those against all foreign banks' claims on China and you still get $2.5 trillion. The BoC fx assets alone stand at $1.2 trillion, alongside ~$200 billion in BoC onshore fx deposits. Add combined gross external assets (SAFE and BIS external assets of Chinese state banks) together and you arrive at $7 trillion in total foreign assets. The pattern is not subtle. Settlement and onshore fx deposits behave like an intervention variable. Fx accumulates during periods of appreciation pressure, when the CNY trades strong in the band. Every data set shows a significant increase in the foreign assets of the state banks over the last 10 years. Meanwhile, roughly $1 trillion in settlement not appearing on PBOC balance sheet has accumulated. This is not a new trick: back in 2005-07, the PBOC moved fx over to the banks to keep it off their reserves. The policy banks (CDB and Exim Bank) have similarly received substantial fx funding. The conclusion is straightforward. The CNY looks like a managed currency. This matters because the managed currency sits beneath a trade picture where China export volume growth after 2023 has clearly outpaced global trade, while Chinese import growth has completely decoupled from (reported) domestic demand growth.

Gold and crypto are rebounding in tandem, and the numbers are striking. Bitcoin price: $77,800. Gold price: $4,674. Strip Bitcoin's 10 best days out and the cumulative return drops to just 14% over the full period. This week was one of those 10 best days, which means the correct strategy was, and remains, to simply hold. Market timing is a game where the penalty for blinking is catastrophic. He identified 17 large-cap (greater than $2 billion) stocks with correlation to crypto, noting that $BMNR correlation to $ETH runs at 80% while $COIN correlation to crypto sits at 74%. If you want equity exposure to the crypto complex, those are your proxies. Not everyone is buying the enthusiasm. $MSTR and $STRC are trading cheaper than the underlying assets of the company even as BTC rallies hard. $MSTR is only matching the return of $BTC despite being leveraged BTC, so should be outperforming handily. The asset rallies; the vehicles designed to amplify it do not. That gap tells you something about where conviction actually lives right now.

Global exports of middle distillates have fallen roughly 30% from levels immediately preceding the Iran War, a supply collapse that has pushed diesel and gasoil crack spreads to record highs on a 10-day moving average basis. Jet fuel cracks remain slightly off prior pinch-point crises in March and before that in 2022. US refineries shifted heavily toward jet yield, driven by the initial Strait of Hormuz mega-panic about jet fuel availability. That reorientation came at the expense of both gasoline and diesel. On the crude side, Saudi Aramco sold at least 4 million barrels of crude loading outside Hormuz to China. The Keystone pipeline has been in operation since 2010, with flow historically disrupted only by wildfires, leaks, and Trump's tariffs. Prices have run above the Fed's target for 65 months now, 59 of which preceded the war.

The US government owes $40 trillion, and the people who lend it money are getting nervous. Treasury moved to double long-end liquidity support operations. What Treasury is doing instead looks more like 'Operation Twist' 2.0, in which the Treasury, not the Federal Reserve, buys long-duration bonds financed by issuing short-term bills. Many investors are questioning the value of the US dollar after recent interventions by the US Treasury concerning the yen and 'Operation Twist' 2.0. Credit stress is showing up in unexpected places: Oracle and Nvidia CDS are making new highs, even as capex intentions sit at a 53-year high. One economist argues that the last quarter century of tax cuts have been a Tier 1 driver of the deteriorating fiscal outlook. Under the circa-2000 tax code, there was enough revenue to make one or two of those adjustments and still have at worst stable-ish debt-to-GDP over the long run. The situation has been compared to the Titanic's watertight compartments. The country chose all four: massive permanent tax cuts, growth in Social Security and Medicare, responses to three recessions, and two major wars. The tax cuts were not exclusively one party's project: the extensions of the 2001/03 tax cuts were enacted in 2010 and 2012, under Obama, and garnered plenty of D votes. Private investors are still buying US Treasuries, for now. US public debt: $40 trillion.