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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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Data on Chinese foreign assets increase in 2010
Data on Chinese Foreign Assets Increase in 2010. Created by Sal Khan.
Want to join the conversation?
Foreign assets is a broad term; what does this specifically encompass? Foreign debt, foreign stocks, foreign property? All? It's not really clear.(3 votes)
It refers to all assets that the Chinese Central Bank holds that are denominated in foreign currencies. :)(4 votes)
- How does buying foreign assets increase the M1 supply? Isn't it using cash that is already counted in the M1?(4 votes)
Sadly, it doesn't use money that is already in the M1.(2 votes)
what exactly do they do with the other 300b or so dollars?(2 votes)- The other 300B dollars (which are actually Yuan) are injected into China's domestic economy to keep up with the rapid growth in goods and services. :)(3 votes)
Is the foreign assets acquired by printing Yuan count toward China's GDP? Thank you.(2 votes)
No. Importing financial assets is not counted in GDP.(2 votes)
Would the Yuan printed by the Chinese Central Bank for the purpose of buying dollars go through the money multiplier? My guess would be no since that Yuan is not deposited in a Chinese bank?(2 votes)- It's a different scenario in 2012. Foreclosures increased demand for rental property, (i.e., all those displaced former homeowners had to go SOMEwhere), which drove UP the rental price. Foreclosures, of course, drove DOWN the purchase price of a home. And of course, low LOW 3.5% interest loans make the cost of home ownership/mortgage cost effective. If you have good credit and 25% down you can get a great low low interest loan now (2012).(2 votes)
China prints Yuan and trades Yuan for foreign assets including dollars. The Yuan is held other than China. What is done with all the printed Yuan held by purchasers?(1 vote)- Or the yuan is also purchased by chinese businesses that hold revenue in USD who need Yuan to pay their staff/wages/owners.(1 vote)
- Is the foreign exchange separate from the foreign assets, or is the foreign exchange a subset of the foreign assets?(1 vote)
- Also kindly explain how buying Foreign assets helps keep the currency devalued.(1 vote)
- I am sorry but i don't understand why you have to multiply 100 million with 100 to get a figure in million again? Kindly clarify. Thank you.(1 vote)
Video transcript
In the last video, we saw that
China had increased its M1 money supply from November
of 2009 to November of 2010 by roughly $700 billion. What I want to do in
this videos compare that to it's increase
in foreign assets. So if we move up here, and
once again, all of this data is straight from the website
of the Peoples Bank of China. And this is the URL
right over here. And so you could get
it for multiple years. and actually they have a
ton of other statistics. And so this chart tells
us their foreign assets and foreign exchange. And I'm actually going to
focus on foreign assets, because when they
print currency, and that's to say with
their printed Yuan they go buy dollars. With that dollar they
could buy-- well, they could keep it in dollars. They could buy treasury bonds. Or they could just
go buy US assets. So assets are the best
measure of what they're holding that is denominated
in other currencies. So let's look at their
growth from November of 2009 to November of 2010. And this is why I
picked November, because we didn't have
December of 2010 in this chart. So foreign assets,
and once again, this is in hundred million Yuan. Foreign assets in November,
2009 183,651, and that's in 100 million Yuan. And then you fast forward to
November, 2010 it is 212,733. So let's, once again,
put that in terms that make a little bit
more sense, at least for someone who's
used to dollars. And I used a very
rough approximation for the US Yuan exchange
rate in the last video. It's actually
closer to 6.58 now. But it gets us to about
$700 billion increase in money supply that we
got in the last video. Now, let's check this out. So we end up at 212,733
hundred million Yuan in foreign assets, November,
2010 minus 183,651. So that's the difference. Now this is in
hundred million Yuan. So let's multiply by 100. And so this will
be in million Yuan. Now if we divide this by 1,000
this will give us billion Yuan. So it's actually close to--
its 2,900 billion Yuan. So it's almost
three trillion Yuan. And if we want to convert
this into dollars-- I'll just use the same 6.5. I could use 6.58. Oh, let me just do 6.58. So divided by 6.58, to put it
into billions of US dollars. So you see that there
is a $440 billion increase in foreign assets
when denominated in dollars. So let's think about that. So let's think about this. M1, so from November,
2009 to November, 2010 M1 was up by approximately
$700 billion. And the foreign assets
were up by approximately, what was that number
that I just had there? Approximately $440 billion. So most of the expansion
of their monetary base, of their M1 base, was to go
out and buy foreign assets over the course of 2010. And the balance is really
just to kind of support the growth of the
actual Chinese economy. But most of it is to go out
there, buy foreign assets in other currencies,
and actually help keep the Yuan devalued. This is Salman Khan of
the Khan Academy for CNBC.