Finance and capital markets
- 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
Floating Exchange Effect on US. Created by Sal Khan.
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- Since a strengthened Yuan would increase the Chinese people's purchasing power, wouldn't the increased demand make oil more expensive?(3 votes)
- In the long run, if Chinese consumers start consuming more energy in the form of Oil, the global demand for oil will likely go up. For example, as more and more Chinese people are able to afford cars, plane flights, etc., they would likely use up a large quantity of oil, and prices may rise. In the shorter term, if the RMB becomes worth more tomorrow on the world market, they can buy oil for a lower price in RMB, so oil (and everything else) would become cheaper overnight.(3 votes)
- How exactly is pegging the yuan bad for the US? It keeps our interest rates low, and makes our prices lower, this sure seems like a mutually beneficial arrangement for both countries, and the industrial jobs if they didnt go to China would probably go to Malaya or India. Why is this so bad for America? Is making the strong currency stronger and the weak currency weaker really bad for either party?(2 votes)
- It has pros and cons for both sides. It makes Chinese goods cheaper for US buyers, which is good for consumers. It makes Chinese labor cheaper, which is bad for US exports and employment.(2 votes)
- How is the appreciation of the RMB against the US-dollar affecting the other countries that have its currency pegged with the dollar?(2 votes)
- Why does the strengthening of the Chinese currency increase the price of their goods? Won't it they decrease because they will make less yuan per transaction and have lower utilization, as shown in the first video on Chinese-American trade?(2 votes)
- Yes, the price of chinese goods relative to the the chinese would decrease (they will make less money selling there goods overseas since the Yuan has gained in strength). So in order to avoid this and to make the same amount of Yuan as they were before, the Chinese Producer is forced to increase the cost of his goods to Americans. Therefore the Americans will have to pay more so the Chinese Producer can make the same amount of Yuan (and not earn less money!).(2 votes)
- Why does China always want to export as much as they can? Why don't they just try to selling their product to their own people?(1 vote)
- Hello, I have a question for Mr. Khan. Based on what you said the floating exchange rate will have effects on U.S Dollar such as the oil, the export and the debt? Do you have any sources to support your saying?(1 vote)
- Would long-term interest rate rise as well in the US?
If China reduce or stop buying US securities or bond, that will decrease the demand for US securities or bonds and that will lower the price and in turn increase the interest rate.(1 vote)
- Why does US get inflation when China allows their currency to float?(1 vote)
- china allows yuan to float, its value against dollar rises, therefore the purchasing power of dollar against the goods imported will become less, as because most of the exported goods are from china, so when purchasing power becomes less, thats inflation(1 vote)
- Wouldn't inflation also go up for the U.S.? Oil and other imports becomes more expensive, and there are less goods available to consume because there are no more cheap goods from China.(1 vote)
- Yes, to a certain extent. Imports become more expensive, therefore net exports increases, which means the aggregate demand curve is shifting to the right. That would indeed cause inflation.(1 vote)
- Is there any way to know what the "true" exchange for the Yuan to USD really is, after all these years of both countries printing currency??? Perhaps it is impossible to really know. No wonder the price of gold is high & stable in many ways. Currency is just paper & who knows what it will be worth tomorrow....(1 vote)
- No, that's not possible but one sure thing is that the Yuan is going to be much stronger than the USD; since they have a massive budget surplus and their exports are more than their imports.(1 vote)
Let's think about what might happen in the United States if the dollar is allowed to weaken relative to the yuan. So the most obvious thing is that Chinese imports will become more expensive. A less obvious effect is whether that will reduce the demand for Chinese imports, or whether that will have any impact on American inflation. The reason why that's not as clear is when you go buy your cell phone carrying case at your cell phone store, and you pay $30 for it, that $30 is not the cost that some Chinese manufacturer is getting for it. That Chinese manufacturer is probably charging on the order of $0.60, or maybe $0.80, or a dollar to produce that cell phone case. The rest of the money that you're paying is really going to the retailer, or to the suppliers, or it's there to essentially pay for shipping costs from China to the US. So this $0.60, which was how much it cost to make this in China, if this now goes up to $0.80, or if this goes up to $1.00 it's not clear that this price even has to change, or even if it were to change from $30 to $31 it's not clear that that would affect demand much. Now the impact that the weakening of the dollar would have on inflation is the idea that all imports would become more expensive. So all imports, potentially. And this depends how other countries react to the weakening dollar. But all imports could become more expensive. And probably the most important import, and once again, this depends on how these currencies react to some of the oil producing currencies-- oil producers actually peg to the dollar-- so it might not be as dramatic as you would think. But in general, if you have a weakening dollar, the most important, from an American point of view, the most important import of all, will probably on the margin become more expensive. And that is oil. We also potentially will have one less buyer going out there and motivating, or at least directly buying, or motivating other people to go buy US debt. So debt might become more expensive. So debt could become more expensive in the United States. And when I say debt becomes expensive that means that interest rates go up. And of course, this is hugely dependent on what the US Fed does. It could step in. It could continue to print more money and essentially keep the debt cheap. But it doesn't look as good optically. Now the last, and probably the most important question, and this is to some degree once again, not a clear cut answer, is what happens to US manufacturing? The argument has been to that essentially, China has been able to a produce cheaper than they would have even naturally been able to produce by keeping their currency devalued. That's allowed them to essentially steal an industrial base from the United States, to deplete the industrial base. Will this come back? Will some of this come back from China or other countries? And it is true, a weaker US currency will help the US exports. But what's less clear is whether industries that are labor dependent, and require maybe huge amounts of skill, whether those are going to come back from Asian. I suspect, like I said in the video on China, that those are either going to probably stay in Asia. Or if we had to think about where they might move if the Chinese currency got stronger, I would think that other parts of Asia, maybe South Asia, or maybe Latin America. If they can get their act together. Those are maybe more natural places to go, because they have the cheap labor. They have lower standards of living right now. And what they would need to do to compete with China in particular is essentially have the infrastructure, and the systems, and the efficiency, and the scale in place to compete effectively. So these are probably the people that China has to worry about the most if they devalue their currency, not so much the United States. Although will help US manufacturing on the margin to have a weaker currency. This a Salman Khan of the Khan Academy for CNBC.