China buys US bonds

in order to maintain a trade imbalance we know that the Chinese central government needs to keep its currency artificially weak and to do that they essentially can print their currency and use that to buy US Dollars so what they do is they increase the supply of un and they increase the demand for dollars keeping their currency weak now the next question you might ask is what do they do with the actual dollars that they bought with the when that they printed well they don't want to just sit on those dollars they don't want to they prefer to be collecting some type of interest on that money so instead of just keeping it all in some warehouse someplace they actually just lend that money to the US government and they lend that money by buying US Treasury bonds by buying tea bills and tea notes so that money that they use that they bought with their printed UN that goes to the US Treasury that goes to the US Treasury in the US Treasury gives the Chinese gives the Chinese central bank Treasury bonds gives them Treasury bonds so these are Treasury bonds now what's the effect of this clearly the Bank of China is getting interest on its money now it's helping to finance the US government's debt but maybe even more interestingly it is creating incremental demand for tea bonds so it is creating a demand for for tea bonds for Treasury bonds now what does that do well if you're increasing the demand for anything that's also going to increase the price so the price of Treasury bonds of tea bills and tea notes goes up tea bills or durations less than one year but notes art durations more than a year so the price goes up but what happens if the price goes up that means that the interest the interest that the government has to pay on this on this debt goes down so that means that the interest goes down and I explained that in more depth in other videos now if the interest goes down that means that the cost of borrowing for the US government goes down but that's also the benchmark rate for the cost of debt in general so in general it finances US debt both of the government and really just credit more broadly so debt becomes cheaper debt cheaper inside of the United States this is Salman Khan from the Khan Academy for CNBC