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Chinese inflation

Chinese inflation. Created by Sal Khan.

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  • leafers ultimate style avatar for user Marek Andreansky
    How can a weaker renminbi undermine the exporters price competitiveness?
    (4 votes)
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    • blobby green style avatar for user Mike Fellman
      The higher inflation in China reduces the profit motive for Chinese producers. If prices go up in China, then the money they obtain from selling exports in the US will have lower purchasing power, regardless of how the People's Bank of China intervenes to keep the Renminbi/yuan weak. China exporters will either be forced to demand more for their exports (hurting competiveness) or accept a lower real price (less lucrative). Either way, this should result in fewer exports. In short TWO mechanisms exist to help balance out the trade. The exchange rate and the domestic inflation (caused by the money flowing in from exports to the US). China can peg its currency all it wants, but it will not be able to control inflation indefinitely.
      (19 votes)
  • leaf green style avatar for user maxmoldova
    Sooo... WHY?!... Why China do this? Why they inject this extra currency (over the amount required for the "undesired" foreign currency to "dissapear") Why they need (hyper-)inflation hit them?
    (1 vote)
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    • starky seedling style avatar for user georgevtucker
      They're trying REALLY hard to keep their exporters competitive -- keeping their prices down -- so the factories can keep running and employing lots of people. Unemployment in a nation that size means massive unrest and social upheaval, and the Chinese leaders are more than happy to debase their currency in order to keep those workers working.

      No jobs? Riots, social unrest, maybe even a coup d'etat...
      (7 votes)
  • male robot hal style avatar for user Levi Lough
    whats inflation deflation
    (2 votes)
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  • blobby green style avatar for user Joba Oviosu
    Can anyone please shed some light on this? I am confused as to why we are seeing inflation in China. If the People Bank of China is printing the required amount of money to keep the Yuan pegged against the Dollar ( or against other currencies it trading with) we should not see an increase in the money supply. Is China printing more Yuan than is needed to keep their currency pegged against the dollar to devalue it even more? If its price inflation we are talking about, I understand that due to a growing economy, there would me more demand for good and services which would lead to prices increases of commodities. But why are the economist stating the rate of inflation could be twice as high? Thank you.
    (1 vote)
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    • ohnoes default style avatar for user Tejas
      Of course there is an increase in the money supply. When you print a Yuan, that is an increase in the supply of Yuan. It doesn't matter that you are buying dollars with them, because all those dollars are loaned back out again. So, both the newly-printed yuan and the dollars are going back into circulation.
      (2 votes)
  • leaf green style avatar for user sf
    I'm so confused about the relationship between domestic inflation in China
    and weaker renminbi relative to dollar.
    Aren't two of the things the same in general?
    (1 vote)
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    • blobby green style avatar for user Rodriguez
      Simply put,
      1. Domestic inflation in China is caused by an oversupply of renminbi (人民币). This occurs because the government is trying to depreciate the value of the RMB to allow Chinese exporters to get a competitive price on their products in foreign markets.
      2. Because the Chinese government is devaluing the RMB, essentially 1 RMB can purchase fewer dollars. Khan explained it like this. If there is 1 RMB and 1 USD in the world,
      1 RMB = 1 USD. However, if there are 2 RMB, 1 USD in the world, 1 RMB = 0.5 USD.

      Thus domestic inflation can lead to a weaker renminbi relative to the dollar.

      That's oversimplified, but I hope it gets the point across. I think this is the basic concept.
      (2 votes)
  • male robot hal style avatar for user KEVIN
    To clarify: is the renminbi actually five yuan or is it conceptually five yuan?
    (1 vote)
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  • blobby green style avatar for user João Lima
    If the chinese central bank is printing yuan to buy excess dollars (and is not giving these yuan to the chinese economy or banks) how can it be creating inflation in China?
    (1 vote)
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  • winston baby style avatar for user Xue Li
    Which part of Renminbi is "extra" Renminbi and which part is not "extra".
    (1 vote)
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  • blobby green style avatar for user manwinder.aries
    "The EXTRA renminbi are feeding inflation" - Tracking the example (from the first video in the series) if they printed 180 million Yuan for the extra 30 million $, all their new print money is being used up in buying $,. Then how is the money supply increasing at home to cause inflation ? In general I mean to ask if all the new Chines Yuan are invested outside the country - will it still cause inflation at home ?
    (1 vote)
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  • blobby green style avatar for user Danny Gursoy
    The inflation is probably due to the increase of foreign trade and decrease of domestic trade. Argo, this means that the rather low ranked yuan is facing against higher denominations, such as the Euro and Dollar. This rivalry is also showing with the USA, due to the fact that the Euro is more powerful than the Dollar due to the increase in trade between the EU and the USA. My question is, do any of you think there will actually be a recession of sorts in China, or will the balance the yuan.
    (1 vote)
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    • blobby green style avatar for user Lok Guu Poh
      I think, there will not be a recession in China for the next couple of years. Of course there are plenty of things that are overpriced at the moment, but in the short term everything will be fine. A recession happens when your income is less than your expenses. Even if you have lots of savings in the bank, you will still feel the slight squeeze when you pay is cut. And that you have to start using your savings. That's how recession feels like: A pay cut or sudden increase in debt where you have to pay more.
      Well, as long as the income continues to flow in without reducing, there will be no recession. More often than not, you can feel the slow down much sooner than the recession. That's usually from reduced income.
      (1 vote)

Video transcript

Given that the Chinese central bank is printing yuan in order to keep it devalued to other foreign currencies, especially relative to the dollar, a question that may have jumped into your brain is, is this causing inflation? And when I talk about inflation, I'm talking about price inflation. Is it making a basket of goods in China more expensive? And the other type of inflation that the word inflation is sometimes to referring to is monetary inflation. That, by definition, is increasing. They are definitely increasing the money supply, but is it making the price of goods and services in China more expensive? And to answer that question, I have this article here from the "New York Times" written by Keith Bradsher, early January, 2011. And he writes, "in China, consumer prices were 5.1% higher in November than a year earlier." Remember, in the US, we try to target inflation to be between 1 and 3%. So the official government data. So this is according to official government data, they admit that their inflation is at 5.1%. But the next sentence is even more interesting. "And many economists say the official figures actually understate the rate of inflation, which might in reality be twice as high." And there's tons of ways to kind of engineer the actual inflation depending on what the basket of goods is and how you adjust for things. Now though, that cheap currency policy seems to be reaching its limits. The extra renminbi-- and this is a big point of confusion when people talk about the currency in China. The renminbi is the name of the currency while the yuan is kind of when someone talks about hey, I give you five yuan, or you owe me five yuan, something like. They wouldn't say you owe me five renminbi. And a good analogy is if you go to Great Britain and you buy something, they'll say, well it'll be five pounds. So in Great Britain, five pounds is what they say when you're actually buying something, but the name of the currency is called the sterling. It's kind of like if people called the dollar US legal tender. That's the equivalent of renminbi, while you yuan would be like the dollar. So five pounds is called the sterling. So the similar analogy, five yuan, they call that the renminbi. So they're saying the extra renminbi are feeding inflation. That is starting to undermine exporters' price competitiveness. Just as a stronger renminbi would do if Beijing was not intervening to begin with. So the whole reason why they're printing this money is to keep the currency devalued, but that's making things more expensive in terms of yuan. So in the end, that's kind of counteracting some of this cheap currency policy. It's making their exports more expensive. Money supply figures for December, which the central bank released on Tuesday, showed that cash and bank deposits were increasing at a rate twice as fast as even China's soaring economy. So if you increase the money supply roughly in line with the growth in the economy, then you wouldn't experience too much inflation. But they're increasing it twice as fast. Ever more renminbi are available to buy goods and services. So you see they're clearly doing that to try to keep their currency devalued, but they're reaching kind of-- it seems kind of a breaking point where they won't be able to do it as aggressively going forward.