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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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Review of China US currency situation
Review of China US currency situation. Created by Sal Khan.
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"... as the chart below suggests, the recent relationship between China's currency and America's trade deficit with China is not what China hawks in the Senate think it is. Rather than a cheap yuan leading to a flood of Chinese imports, the yuan has actually strengthened as the deficit has widened." http://www.economist.com/blogs/dailychart/2011/10/america-and-china(4 votes)
Sal's arguments still hold true. China has adopted a policy of allowing the Yuan to very gradually appreciate and this is reflected in the noted chart. In a free floating currency world the Yuan would be appreciating much more quickly(3 votes)
- I don't understand why we blame China so much.Isn't the FED just as much at fault for continuing to print up the money to keep up with China as well? As we send more and more money abroad it gives the PBoC breathing room and motivation to print up their yuan to make up for the difference.If we would stop increasing OUR money supply so that we wouldn't have the money to buy their goods and send them our money,wouldn't that begin us in the right direction of solving the problem?Maybe i dont get it(4 votes)
The Federal Reserve isn't replacing the money being sent to China. The People's Bank of China is just loaning the money back. But, even if the Chinese Central Bank didn't loan the money back, and the Federal Reserve didn't print any money, that would make little difference. Only a very small portion of the dollars in circulation are being used in the foreign exchange market.(2 votes)
Why would China want its Yuan weak? And does it want them weak in real life, or is this just a scenario Sal's setting up?(1 vote)- China keeps its dollar artificially low so that countries like the US will buy its goods. China is the US's largest trading partner and if they didn't sell their goods for super cheap, markets like India would be able to under cut the Chinese and then the US would buy goods from Indian instead of China. There is so much trade between China and the US that China profits immensely without needing it's Yuan to appreciate. This of course hurts the average Chinese person in that their labour is devalued but it beneficial for the country as a whole as it has quickly become a super power economically.(7 votes)
- Dude, the PBOC is buying time because if China transitions to a consumer based economy (as it should) there would be massive shock to the system. Not just an economic shock, but a possible revolutionary shock. Seeing as how the Chinese government is attempting to manipulate labor costs even further, it is only a matter of time before the people are sick of stagnant wages and rise up. Then they will let the Yuan float, as it should. And please, we all operate dirty exchange rates. Help?(3 votes)
- it seems chinese work hard only for buying the american bonds. chinese work hard to produce goods, and supply them to american, then chinese also lend the money to american. that is so unfair to chinese.(1 vote)
- Why is it unfair to the Chinese? They get paid interest on the money they lend. In the future, they will be able to use that money to purchase American goods.(4 votes)
- It is a business and financed focused news channel.. It is mandatory viewing for many investors(2 votes)
- Can't the US increase its interest rates (making debt expensive) to counterbalance the effect of the increased money supply?(2 votes)
Wouldn't reduced interest rates reduce cost of funds for commercial expansion. Commercial expansion would reduce some of the stresses in the US economy.(1 vote)- Reduced interest rates would indeed make it easier for corporations to expand. It would also make it easier for low credit individuals to gain money, which they then waste. As a result, it would become more likely for lenders to fail to get their money back, seeing as interest is a way to hedge against the risk. That makes the economy more unstable. In fact, many economists attribute lowered interest rates to be the ultimate cause of the factors which led to the Great Depression.(2 votes)
- It makes one question how a process of trading paper money printed by our central banks back and forth, and exchanging some goods and services along the way, can actually last.(1 vote)
Brilliant question! Infact, that's the question I had 8 months back, and still reading and exploring to find an answer for!
- Common man who started to learn Economics.(1 vote)
- How does the interest rate for the treasury bonds affect general interest rates in the US?(1 vote)
Video transcript
Let's review how China can
maintain a trade imbalance with the United
States by artificially keeping its currency weak. So we had a simplified
scenario where we had an exchange
rate of 6 yuan per $1. We had a Chinese manufacturer
selling $50 million worth of microwaves
in the United States. We had a US software
producer selling $20 million worth of software in China. If we had a floating exchange
rate, the supply of dollars is much greater than
the demand for dollars. So the dollar would
become weaker. It would become weaker, and
the yuan would become stronger. And that would resolve
the trade imbalance We saw that the
People's Bank of China does not want that to happen. So what they do is they
artificially create demand for dollars
to keep it strong. They do that by essentially just
printing yuan and converting it to dollars. And that obviously also
increases the supply of yuan, so it makes that less expensive. It weakens the yuan,
strengthens the dollar. Now, they're not
just going to sit on literally cash with
those dollar bills. They'll actually want
to lend to them out. So what this does is it
increases the supply of money for loans, supply of loans. Well, if you increase the amount
of dollars that can be lent, that's going to lower the
cost of borrowing dollars. So the effect is you are
lowering borrowing costs. And if you're lowering
borrowing costs that just means interest is less, and it's
easier to use your credit card, either if you're
the US government or if you're the US consumer. Now, if debt becomes cheaper or
we have lower interest rates-- If you have a lower interest
rate on your credit card that means that you're
just going to consume more. So the end result,
the big picture of what's happening here,
in order to maintain a trade imbalance, in order
to keep its currency peg, you have the Chinese
Central Bank essentially printing money,
converting it to dollars, and then lending that to the
US government and consumer, and what are they
going to do with it? Essentially, they're
going to end up buying more Chinese goods. In our simplified
example, they'll buy even more microwaves. This is Salman Khan of
the Khan Academy for CNBC.