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Course: Finance and capital markets > Unit 8
Lesson 6: Chinese currency and U.S. debt- Floating exchange resolving trade imbalance
- China pegs to dollar to keep trade imbalance
- China buys US bonds
- Review of China US currency situation
- Data on Chinese M1 increase in 2010
- Data on Chinese foreign assets increase in 2010
- Data on Chinese US balance of payments
- Chinese inflation
- Floating exchange effect on China
- Floating exchange effect on US
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Data on Chinese M1 increase in 2010
Data on Chinese M1 Increase in 2010. Created by Sal Khan.
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- If they increase the money supply (M1) to buy dollars, does the amount used to buy dollars then come out of the M1 figure?(3 votes)
- Well I think it would be better to say China's bank increases M0, and as a consequence M1 rises. If the new M1 is converted to another currency though, there has to be someone on the other side paying dollars to buy Yuan. So someone that used to own dollars now owns the new Yuan, so they don't disappear from M1. The new Yuan are still in a bank somewhere, or turned into paper.(3 votes)
- So when people talk about China having some $3 trillion in reserves, they are talking about foreign exchange reserves and they are counting the amount of bonds they hold not actual foreign currency?
So in the case of USD reserves they hold, are they talking about bonds or simply USD? Does anyone know?(2 votes)- The foreign exchange reserves is and account balance. The actual bonds are some of the assets held in that account. Cash of various types are probably some of the other assets. More recently some real estate is also included in those assets(2 votes)
- 0:44Why M1 money is taken into account when actual money printed by central bank is described by M0 money?(2 votes)
- Because M1 can also be immediately transacted with. The Chinese Central Bank might have also created some M1 in the form of electronically transferred money and used that in currency exchange markets. :)(1 vote)
- Why does Sal calculate the increase in M1?
Does'nt the increase in currecy (M0) give a more accurate picture as that is what the PBC is printing and that is what is exchanged for dollars?(1 vote)- I'm guessing that the dollars were already in China. They bought the dollars off a manufacturer in China that got the dollars from US. This way it becomes M1. They wrote a cheque to the manufacturer and the money is in the bank.
My guess is the $US might be M0, but maybe they can get out of that too somehow.(1 vote)
Video transcript
We've talked a good bit about
how the Chinese government is printing yuan to buy a
foreign exchange to keep the yuan devalued. But what I want to
do in this video is actually look at
the data and show you that I wasn't making
all of that stuff up. So this is actually data from
the People's Bank of China. This is directly
from their website. And right over here, this
is the 2010 money supply. This is the 2009 money supply. You can get any money supply,
any year that you want, from their site. And what we could do is just
look at what happened over just even 2010, or from a
same point in '09 to '10. Let me take November '09 to
November '10, and I'll look at their M1 money supply. I'll look at their
M1 money supply. I'm going from
November to November because we'll see some
of the other charts, we actually have data for there. We don't have
December to December for some of the other charts
I'm going to use in this video. But it just gives
the general idea. If you go from November of 2009,
the M1 money supply, now this is in hundred million yuan. So there was a 212,493
hundred million yuan. And we'll try to convert
these into numbers that make a little
bit more sense. And then you fast forward
to November of 2010, the M1 is 259,420 hundred million yuan. So if we-- let's
get a calculator out and actually make
some sense of that. So a year later, it's
at 259,420 and from that let's subtract what it
was before, 212,493. So the difference is 46,927. Now this is in
hundred million yuan. So if you wanted
it in million yuan, you want to multiply by 100. I think it's pronounced
"you-wen" or "you-won." I'm not a Chinese
pronunciation expert. This is in millions of yuan. And now if we wanted
it in billions we can divide this by 1,000. So let's divide this by 1,000. So it's roughly
4.6, 4.7 trillion yuan increase in
their M1 money supply from November, 2009
to November, 2010. Sort of a pretty
dramatic increase. And just so you could put
this in the scope of dollars I'll use a rough approximation
for the current exchange rate, 6.5 yuan per dollar. So let me just
divide that by 6.5 to get a rough approximation for
what that would be in dollars. And we get $721-- remember
this was in billions-- so we're actually $722 billion expansion
in the M1 money supply of China from November, 2009
to November, 2010. In the next video,
we're going to see how this compares to the actual
increase in foreign exchange, or actually foreign assets. And we can see how much
of this was actually just to go and go buy
things from other countries, or buy foreign exchange from
other current countries, and essentially to keep
the Chinese yuan devalued. This is Salman Khan of
the Khan Academy for CNBC.