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Finance and capital markets
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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China pegs to dollar to keep trade imbalance
China Pegs to Dollar to Keep Trade Imbalance. Created by Sal Khan.
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I don't understand one thing, if someone could explain please..
How is this Chinese policy acceptable to the Chinese citizen? I mean, continuously printing Yuan currency isn't wiping out/devaluing Chinese worker's savings?(4 votes)
Actually, as far as the control of currency, there are no free countries. Nobody has a say on what the FED's policies are except for the FED. The FED and the private banking institutions that technically own them don't care about what we (the American Citizens) think either.(17 votes)
- Isn't this all based on the fact that everyone has "faith" in the dollar as major currency...(People protest and Government admits to being broke and full faith can't be honored because all based on a ponzi system)Wouldn't all this printing (China) just create a worthless currency or move towards hyper inflation? Similar to how when the South lost the Civil War and printed it's own currency.Because if you have an oversupply and no one to trust in your currecy does this hyper inflation happen???(1 vote)
- Good question. :) I'm no expert on economics, but I can answer your question in part. The system is based largely on faith in the dollar as a major currency. However, while the U.S. does have an enormous national debt, which will likely never be repaid fully in our lifetimes (the debt was last repaid under Andrew Jackson), it is not "broke." Despite the US's recent credit downgrade, the world is still willing to lend to us at extremely low interest rates, due in part to the crises in Japan and Europe. In fact, the interest rate on ten year Treasuries is 1.89% as of 11/23/11. This makes our national debt relatively easy to finance. In fact despite our enormous national debt and deficits, as a percentage of GDP, we were paying more on our national debt in 1990 than we are now. Since we haven't defaulted on our obligations, we're still honoring the United States' "full faith and credit." Also, the dollar isn't based on a Ponzi scheme. (Sal has a great explanation of Ponzi schemes on one of his videos.) While it's true that a dollar in itself has no intrinsic value, it represents a claim to future goods and services. (Sal covers this further in his playlist on Banking and Money.) As for the second part of your question, I'm not sure. I'll leave that for someone with more knowledge on the topic to answer. I hope I was helpful. :)(5 votes)
- Why wouldn't you want to make your currency stronger?
So, the reason to maintaining the trade imbalance is only to keep the price of the microwaves low (and not loose US customers), while causing inflation and a weaker currency?(2 votes)
But, there are so many other countries in the world. Why would China maintain a trade imbalance only with USA? It is not like only the USA buys the Chinese products, right? Chinese products could already have or develop a demand in other countries as well, right? Please let me know your thoughts.(1 vote)
This should totally be linked to the currency reserves section because it really helps to clarify concepts explained in the accumulating resrves video by sketching the bigger picture.(1 vote)
According to this china pegs its currency so that it can increase its export but when we look at goods and services in real term doesnt this mean china is selling higher quantity of products at a cheaper price whereas the US is able to sell its products at a higher price. Or in other words US consumers gain and Chinese consumers loose.(1 vote)
Yes, US consumers gain and Chinese consumers lose, but on the other hand China's manufacturers gain while US manufacturers lose.(1 vote)
- How long can China keep up the imbalance before there are negative effects?(1 vote)
As long as it wants to be a major importer. Eventually they will develop to such a point where they may choose to stop creating cheap goods at which time they can allow the yuan to value normally.(1 vote)
- Why doesn't the US adopt a fixed currency?(1 vote)
We had one, the gold standard where the value of a dollar was mandated by the value of gold as set by the Government gold standard (~$32 OZ). It collapsed as their was no way to grow the wealth of the economy with a fixed currency.(1 vote)
does anyone one know what this means and if its a concept?(1 vote)- You can't allow currencies to float because it eliminates the "opportunity" cost. How do you plan to encourage financial opportunities such that that entire industry doesn't collapse?(0 votes)
Shouldn't China theoretically overcompensate when printing money? When China prints 180m CNY to fund the 30m USD trade imbalance this will likely create inflation in China. With increased costs, the person in China selling the product for 50 USD will likely increase prices, resulting in decreased demand and closing trade imbalances each year.(0 votes)
Video transcript
For the sake of
simplicity, let's assume that the current
conversion rate is six Chinese yuan per
for one US dollar. And at that exchange rate,
China is exporting $50 million worth of goods to
the United States and the US is
exporting $20 million worth of goods to China. So clearly, there's
a trade imbalance. The US is importing $50
million worth of goods and it's exporting $20
million worth of goods. So it has a $30
million trade deficit. Now, in this situation,
the Chinese manufacturer is going to have $50
million that it wants to convert from its
revenue in America and convert that to
Chinese currency. The American
manufacturer is going to want to convert its
yuan into $20 million. So the supply of dollars,
which is this $50 million right over here, is
going to be much greater than the demand, which
is a $20 million. So if the currencies
were allowed to float, the dollar would weaken. The cost of the
dollar would go down. Its supply is so much
bigger than the demand. But let's say that the
Chinese central bank does not want that to happen. So this is the
Peoples Bank of China. They do not want
the Chinese currency to strengthen because
if that were to happen, then Chinese goods would become
more expensive in the United States and it would be harder to
maintain this trade imbalance. They want it. So what they do is
they essentially make up for the difference
in demand for the dollar. Right here there's only
demand for $20 million. There's supply of 50. So what they do is they
create demand for $30 million. And the way that they create
demand for $30 million at that exchange rate is
that they can literally print, create 180. They could literally
create 180 million yuan. And then at an exchange
rate of six to one, that would essentially--
and they would go out there into the open markets and try
to convert this into dollars-- and so this would
create a demand for an incremental $30 million. And so when they do that,
the total demand for dollars is their $30 million
plus the $20 million from the American manufacturer. That will completely equal
the supply of dollars at that exchange rate. And so it will not
cause the exchange rate to fluctuate or the
balance of trade to change. So this is clearly a
very simplified example. The actual numbers are much
larger than in the millions. They're in the hundreds
of billions of dollars. But this gives, at
least in my mind, a respectable idea of how
the Chinese central bank is actually keeping its
currency pegged to the dollar and how that's helping to
maintain a trade imbalance. This is Salman Khan of
the Khan Academy for CNBC.