Main content
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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China buys US bonds
China buys US Bonds. Created by Sal Khan.
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Why does not China invest their money in investments that pay higher interest?(4 votes)
Higher interest = higher risk.Bonds are safe and are guaranteed by the US government.(10 votes)
- What does it mean for "debt to be cheaper" inside the US?(4 votes)
- when the Chinese buy US debt, they are lending money to the US Treasury. this is an increase in the supply of loans. increasing the supply of loans decreases the price of loans. the interest rate can be thought of as the price of a loan. thus the US Treasury borrows money at a lower interest rate, thereby making US debt cheaper from the perspective of the US Treasury. since US Treasury bonds are the benchmark for most credit in the economy, debt is cheaper across all sectors of the US credit market(3 votes)
What is the relationship between bonds and interest rates ? Does a Bond-Interest Rate curve exist ?(2 votes)
Interest rates go up, bonds go down. Interest rates go down, bonds go up. The longer the term of the bond, the greater the variation with interest rates.(2 votes)
- How does rise of T-bonds price leads to lower US interest rate??(1 vote)
- Why did the price of the T-bond go up? The only reason would be because interest rates are down. It's just two different ways of looking at supply and demand for borrowed money.(3 votes)
- so why can't the USA print a bunch of money to devalue their own dollar, and buy China's bonds?..(1 vote)
- The exchange rate would shift so that it would take more US bills to buy the bonds
There would be inflation
What would be the purpose of doing this?(2 votes)
- What is oil import of China? Wouldn't pegged (and rather devalued) currency makes oil import expensive? And again can't China do Over the counter trading to fix the forex rate for USD-CNY? And eventually hows China GDP dependent on this?(1 vote)
- Reason for Devaluation of Chinese Currency?
please ask me the 4 to 5 reason(0 votes)
There is only one reason. The Chinese central bank has printed yuan to be used to buy dollars.(1 vote)
Sal dosn't mention if the US is making their currency artifically strong, by removing money. Does the US do so?(0 votes)- Then why does the news say that the US Dollar is really weak, and that this is hurting the economy, or somethinglikethat?(1 vote)
- Why is CHINA buying gold and not US tresuries any more? What do you think about gold? Is it a yellow relic or a currency?(0 votes)
They may be buying some gold but not in lieu of treasuries. Gold is a commodity asset that can be purchase from some central banks or the worldwide gold exchange. No country uses gold as its currency. Many CB's have little or no gold.(1 vote)
- Wouldn't a floating exchange rate that you propose then lower the funding given to the US government through the purchase of T-Bonds?(0 votes)
- No. When the Chinese purchase T-securities, they do so with dollars (as does everyone else). They cannot be purchased with yuan (or euros, or any other currency).(1 vote)
Video transcript
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 yuan 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
yuan that they printed. Well, they don't want to
just sit on those dollars. They'd 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 T-bills and T-notes. So that money that they use that
they bought with their printed yuan, that goes to
the US Treasury. And the US Treasury gives the
Chinese Central Bank 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 T-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 T-bills and T-notes, goes up. T-bills are durations
less than one year. Notes are durations
more than a year. So the price goes up. But what happens if
the price goes up? That means that the interest
that the government has to pay on this debt goes down. And I explained that in
more depth in other videos. Now, 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
inside of the United States. This is Salman Kahn from
the Khan Academy for CNBC.