Scott Bessent's Return: The Yuan's Hidden Games and What It Means for Crypto

What happens when a legendary financial strategist, known for his prescient bets against currencies, faces off with one of the world’s most tightly controlled currencies? Scott Bessent, who famously bet against the British pound in 1992, is now navigating similar waters as the U.S. Treasury Secretary, confronting China's management of the yuan. But what does this mean for the wider financial network, particularly for crypto?

The Raw Data

Currently, the yuan is considered undervalued by about 20% according to Brad Setser, a senior fellow at the Council on Foreign Relations. This undervaluation is achieved through China’s strategic accumulation of dollar reserves, estimated at $1.8 trillion, and additional off-balance-sheet holdings, which total around $2.5 trillion. Despite the apparent undervaluation, the yuan has gained roughly 7% against the dollar over the past year, highlighting a nuanced shift in China's currency policies.

Historical Context

China’s currency management tactics echo its long-held strategy to maintain a competitive edge in global markets by keeping exports cheap. The yuan's undervaluation isn't unprecedented. Such maneuvers have been part of China's economic playbook since it joined the World Trade Organization in 2001. During the 2010s, the U.S. often turned a blind eye to these practices, which only gained serious political traction when President Trump labeled China a currency manipulator in 2019. This label led to strategic economic structuring, like the Mar-a-Lago Accord that supported tariffs.

Insider Insights

Setser suggests that if China continues its current financial strategy, we could see the yuan strengthen significantly, trading up to 10% or even 20% higher. According to him, this is straightforward if the financial account remains closed as it's now. This sentiment is echoed by Jon Hilsenrath, an economic advisor who believes the current U.S. administration is less concerned with the yuan's manipulation due to more pressing economic issues and the potential for the yuan to appreciate slightly. Bessent himself has remarked that the yuan's current strength against the dollar alleviates some pressure from the U.S., even if it poses a challenge for Europe.

What's Next?

So, where does this leave the crypto markets? As fiat currencies like the yuan fluctuate due to artificial manipulation, crypto assets could stand to gain as non-correlated alternatives. The volatility created by geopolitical tensions and currency manipulations can drive risk-averse investors towards decentralized financial assets as a hedge. Could this mean a surge in interest in crypto during periods of currency instability? It's plausible. Traders should watch key events like upcoming summits between the U.S. and China, where decisions on trade and currency policies could ripple through the markets. For crypto investors and enthusiasts, these developments could mark periods of opportunity amidst traditional market shifts.