If you're seeing this message, it means we're having trouble loading external resources on our website.

If you're behind a web filter, please make sure that the domains *.kastatic.org and *.kasandbox.org are unblocked.

Main content
Current time:0:00Total duration:4:16

Video transcript

we know the US is running a relatively large trade deficit relative to China in 2009 we imported two hundred and sixty billion more than we exported to China and we know from the last few videos that the way the way that China is keeping their currency from appreciating because of this trade imbalances that they're going out they're printing money and using that UN 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 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 are how much how many Treasury securities they are actually holding you could see China is the biggest holder it is the biggest holder if you go to November of 2009 it has 929 billion dollars this is the People's Bank of China has 929 billion dollars 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 did they how are 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 buy other US assets but even over here we saw that they didn't buy a ton of other US assets and clue to what's happening here and this won't this isn't exactly what's necessarily happening it's far more complicated than I can 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 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 and balance one way or the other with the United States and we actually see we actually see that its currency really didn't change much over the course of 2010 it's been about 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 and this is that China has decided to somewhat diversify from buying US Treasuries and in particular US assets and maybe they're diversifying it to the pound sterling maybe they're diversifying to the euro and so they will start buying 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 it's actually happening and maybe one other small point is that the Chinese government has slowly allowed its currency to appreciate but this isn't the the appreciation isn't as dramatic as this chart makes it look this is six point eight six point eight and when to the dollar at the beginning of 2010 to about six point six if we're not getting close to zero here this is just from six point eight to six point six 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