We know the US is running
a relatively large trade deficit relative
to China in 2009. We imported $260 billion more
than we exported to China. And we know from
the last few videos that the way that China
is keeping their currency from appreciating because
of this trade imbalance is that they're going out
there, printing money, and using that yuan to buy dollar assets. And we see over here
in 2006, 2007, 2008, major increases in US assets. But what's a little
bit more interesting is that, in 2009, we didn't
have a huge increase. It's pretty large by any
standard, but not large enough to offset the actual
trade imbalance. So how did China keep
its currency peg? Even better, let's actually look
at-- because this isn't just the Chinese government. These are just ownership of US
assets by Chinese nationals. But we can actually look at
the major foreign holders of treasury securities. This actually comes from
the Treasury's own website. And it tells us how much
different central banks, how many the treasury securities
they are actually holding. And you can see China
is the biggest holder. If you go to November of
2009, it has $929 billion. This is the People's
Bank of China. It has $929 billion
worth of US treasuries. But what's interesting here,
it is the largest holder, but as we go from November
of 2009 to November of 2010 their holdings
actually went down. Not by a ton. They're still right
around $900 billion. But they went down. So given the fact that we
have this trade deficit, given the fact that they want
to peg their currency, and that they want to
print money, and go buy other people's assets,
how did this happen? How did the number of
treasuries actually go down? And actually how were they able
to reduce the amount of all US assets that they bought? Now, the treasury
answer is they don't have to just buy treasuries. They could by other US
assets, but even over here we saw that they didn't buy
a ton of other US assets. And a clue to what's
happening here, and this isn't exactly
what's necessarily happening, it's far more complicated than
I could explain in one video, is that we do see other
countries whose US Treasury holdings are
increasing dramatically over the course of 2010. In particular, you see
the United Kingdom. Their holdings have grown from
$155 billion to $500 billion over the course of 2010. And this is relative. The United Kingdom does not have
a significant trade imbalance one way or the other
with the United States. And we actually see we actually
see that it's currency really didn't change much over
the course of 2010. It's been about the same. And this looks more
dramatic than it really is. So the answer, and it could
be much more complicated than this, is that China has
decided to somewhat diversify from buying US treasuries,
and in particular US assets. And maybe they're diversifying
to the pound sterling, maybe they're
diversifying to the Euro. And so they will start
buying, say, British assets. But the British don't
want their currency to appreciate too much
because then they'll suffer trade consequences. Their goods will
be too expensive. And so the British
Central Bank would then want to maybe, so that
their currency does not appreciate relative
to the dollar, they'll want to go and
buy American assets. And that's what it looks
like is actually happening. And maybe one other small point
is that the Chinese government has slowly allowed its
currency to appreciate. But the appreciation
isn't as dramatic as this chart makes it look. This is 6.8 yuan to the dollar
at the beginning of 2010 to about 6.6. And we're not getting
close to 0 here. This is just from 6.8 to 6.6. But over the last
several years they have slowly been allowing
their currency to appreciate. But what's really happening is
that they're diversifying away from dollar assets. But when they buy
those other currencies those people are going to want
to buy dollar assets to keep their currency from
moving too much.