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Pegging the yuan

How the Chinese Central Bank could peg the Yuan to the dollar by printing Yuan and buying dollars (building up a dollar reserve). Created by Sal Khan.

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  • blobby green style avatar for user lilauz
    If China prints new money, their inflations rates should be huge, but it isn't that huge. How does the chinese government avoid high inflations rates?
    (18 votes)
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    • blobby green style avatar for user elroylawless
      Also, its important to remember that there are great deflationary forces working in China just as there were in the US in the 1800's and early 1900's. As China becomes more efficient and productive (which has been occurring at a very rapid pace as of the last couple decades) this efficiency and productivity puts great downward pressure on prices. China is printing enough Yuan to not only negate the downward pressures but to push prices up.
      (8 votes)
  • blobby green style avatar for user haseebxn
    how does the central bank know how much Yuan to print?
    (8 votes)
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  • blobby green style avatar for user Pinkemena Dianne Half-Tau
    Wouldn't China importing more goods to the US than the US to China, a situation that the Chinese Central Bank wants to preserve, lead to a loss of goods in China? That coupled with the price of the Yuan leads to inflation. Why does China want this?
    (4 votes)
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    • blobby green style avatar for user Marshall Stanton
      If they are exporting more goods, they will draw in greater revenue, which can then be put to work at home in China. That extra revenue can be used to build more factories to produce more goods, or just simply to import more goods, from somewhere else at a cheaper price, so either way there is a scenario where they wouldn't have a loss of goods.

      It would also depend on the types of goods being exported and whether there is a high demand for them in China. Obviously, if there is more demand for goods at home than abroad, a company would do well to cater to its domestic markets, rather than ship them abroad. But again, these rates are merely to encourage international trade, not ordain it.
      (8 votes)
  • blobby green style avatar for user Rishabh Bhatia
    How can China jus print new money out of nothing? They take dollar to print Yuan and release Yuan to market, in this way they are just addding money to the system out of nothing. In a way they are just prinitng more Yuan more themseleves out of nothing and even accumulating dollars that they use for buying assets. This is not fair or legal.
    (4 votes)
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    • blobby green style avatar for user Josh
      Well, where do you think all of their money came from in the first place? They printed it. A government has every right to print its own money.
      The reason it isn't unfair to continue printing their money and buying dollars with it is that the more Yuan they print, the less the Yuan will be worth. Printing money causes inflation and devalues your currency.

      The reason why China is still intentionally doing this however is that they wish to continue exporting their products to the U.S. As happened in these videos, when China exported more value to the U.S. than they did to China, it caused the value of the Yuan to increase in relation to the Dollar. As such, the price of Chinese products increased and this reduced the amount of Americans willing to buy Chinese products.

      The Chinese government however still wanted to continue selling their products to the U.S, so they decided to print more money and intentionally devalue the Yuan, so that the Americans would continue to buy their now cheap products.
      (7 votes)
  • aqualine ultimate style avatar for user Victor Serra
    So Donald Trump is right on China? They keep a huge trade surplus with America, they develop their industry at the cost of american industries getting depleted, and as if that wasn't good enough they get trillions of dollars. The only cost of doing so is that they get double digit inflation. Yes, America gets cheap stuff but is it worth nurturing the economic power of a geopolitical rival?
    (1 vote)
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  • blobby green style avatar for user Karam  Abdulla
    why would china want to keep their currency the same. If their yuan becomes more expensive, isn't that good for the economy.
    (1 vote)
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  • blobby green style avatar for user nube6666
    Regarding the intervention by the chinese cnetral bank; if the CB sells Yuan on the market, and gets dollars in return - so they accumulate dollars, and that's fine. But hold on: we're exchanging newly printed Yuan for these dollars - these Yuan are then sold on the market. So: if China is accumulating USD, then "somebody" (the US?) must be accumulating newly printed Yuan? In the same amount, I might add! but you never hear about the "holders of Yuan" in the media-only the Chinese' USD reserves
    (2 votes)
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    • blobby green style avatar for user Joshua Divine
      Remember, China isn't actually holding cash dollars. They're holding treasury bonds denominated in dollars. So what they buy are treasury bonds (our debt). We don't really "hold" the yuan, it's spent via the federal deficit. The reason they have dollars is because they run a surplus and keep some foreign exchange reserves.
      (2 votes)
  • primosaur ultimate style avatar for user Jerry
    Does anyone know the current inflation rate in China? If so, if I wanted to exchange $1 into Yuan, then how much Yuan could I get?
    (2 votes)
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  • blobby green style avatar for user m.delsavio11
    Why is the Chinese Central Bank converting the yuan that they printed into dollars and then holding onto them? Don't they need to be release into into the economy to prevent the yuan from gaining value?
    (2 votes)
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    • ohnoes default style avatar for user Tejas
      No, by keeping them, they are restricting the supply of dollars. As a result, the price of a dollar remains high with respect to a yuan, or the price of a yuan remains low with respect to a dollar. If the Chinese Central Bank tried to get rid of them, they would be increasing the supply of dollars, which would actually end up decreasing the price of the yuan.
      (2 votes)
  • blobby green style avatar for user luanto.vu
    At when the Chinese central bank sells the just printed 500 yuan for dollars, is it selling to the Chinese exporter? That would give the Chinese exporter 500 yuan and reduce the amount of dollars in the market to $50, which is exactly the amount the American exporter wants.
    (2 votes)
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Video transcript

In the last video, we saw a reality where the currency between, or the exchange rate between, the Yuan and the dollar started off at 10 to 1. And at that exchange rate, China was shipping more goods-- in terms of whether you measure it in dollars or Yuan --was shipping more to the U.S. than the U.S. was shipping to China. And because of that, we saw an imbalance in the currencies. The Yuan became more expensive, or the dollar became cheaper, until eventually Chinese goods got expensive enough that there was less demand in the U.S. and U.S. goods got cheap enough, that there was more demand in China, that the trade actually came into balance. Now, that's OK if everyone wanted to have balanced trade, but what if the Chinese government didn't want that. They said, hey, we needed to develop, the United States is already developed, we want to have an industrial base, we want to have a market to sell our goods to. We want to export more to the United States than we import from them. We want export-led growth. So they don't like the dynamic that they saw, they did not like the currency, they did not like the Yuan getting expensive. So let's say the Chinese government-- let me scroll up a little bit --so the Chinese government wants to keep currency exchange pegged at-- I ran out of space over there --at CNY 10 per dollar. And they want that because they want this situation to keep on going forever, that China keeps shipping more to the U.S. than the U.S. ships to China, or maybe they wanted to go even more, that China keeps shipping more and more to the U.S. than the U.S. ships to China so that China could build its industrial base. And, I guess the more sinister view is also so that the United States' industrial base gets depleted. That they keep manufacturing things cheaper and cheaper and cheaper, and then United States manufacturers can't compete. And we'll talk about this in more videos, it's not it's not clear that it's 100% one-sided. There's actually some benefits that the United States also gets from this, and we'll discuss that more. It's a little bit more involved. So how could they do this? Let's just say that the Chinese government wants this reality, and they want this reality frozen. They do not want the reality where the trade balances. How could they intervene in currency markets so that this doesn't change? Because, as we said, if more Chinese goods are being bought, there's more demand for Yuan, the Yuan should appreciate, the dollar should go down. But how do you get both? How do you have your cake and eat it too? How do you get more goods being shipped to the United States than back to China without the Yuan appreciating? And the way you do that, there's the Chinese government, or maybe in particular we could talk about the Chinese Central Bank. The Chinese Central Bank, which is a part of the Chinese government can say, hey, to keep our Yuan devalued, we will print money. So let me draw the Chinese Central Bank. Let me do this in a new color. And what they do, they can actually just print money. So we had this scenario that I had outlined in the last two videos where we had this imbalance. There was demand for CNY 1,000, but only supply of CNY 500. So what they can do is just equalize this. They could just print CNY 500 and then try to convert that into dollars. So what just happened? Now all of a sudden, we have $100 that are trying to be converted into roughly CNY 1,000 or if that exchange rate were to be constant. So there's demand for CNY 1,000. Before the Chinese Central Bank got involved, there was only a CNY 500 supply. But now the Chinese Central Bank says, OK, there's a demand for CNY 1,000, there's only CNY 500 supply, we're going to produce another CNY 500. We literally can just print it, and then they will convert what they printed into dollars. So just like that, you now have a balance of supply and demand. You have CNY 1,000, 500 here and 500 here that want to be converted into dollars, and then you have $100 that want to be converted into, I guess, CNY 1,000. So if they were to do this, the currency wouldn't change. The exchange rate would change. The supply and demand of the two currencies would be equal. Now, and that would work and frankly that's what they have been doing for some time now. But there's one kind of catch here. The whole time that they're doing this, what is happening? Well, they keep shipping more to the United States then the United States is shipping to China. These guys keep having to print Yuan and buy dollars with those Yuan in order to keep the Chinese currency cheap. So these people are going to keep accumulating dollars. They just keep printing Yuan and then they just keep accumulating dollars. Let me draw that over here, so the Chinese Central Bank just starts accumulating many, many dollars. They can they can print Yuan as much as they want, those Yuan, they trade them into dollars and then these guys start accumulating more and more dollars over here. And the more that they want this trade imbalance to occur, the longer they want it to occur, the more dollars that they will have to accumulate. So they have to just keep on doing it, they can't even stop doing it. They have to keep doing it in order to keep the trade balance the way it is. And in the next video, I'll talk about what they actually have to do with these dollars because they actually won't just keep it in cash, what they actually have to do with these dollars, and then what effect that actually might have on the United States economy. Then we could talk about how this might unwind itself, but we'll find out it's actually very difficult for this scenario to unwind once it gets started.