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Main content
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Video transcript

I use simplified numbers when we first thought about how the Chinese government can intervene in foreign currency markets to keep their currency devalued what I want to do in this video is to actually look at some of the real numbers so this is from the US Bureau of Economic Analysis B ei gov this is the URL where I actually got this data and this right over here is the US balance of payments relative to China and this part right over here is the current account which is really tells us the imports versus exports and this over here is the capital account sometimes called the financial account depending on depending on how you are accounting for it and this tells us about the inflow or the outflow of ownership of assets so this is goods this is assets you could think of it's money or securities or other things like that now you can look from 2006 2006 we did export some things to China 72 billion worth in 2006 this is in millions of dollars so 72 thousand is 72 billion increased to 85 billion 95 billion stated around 95 billion in 2009 but but the United States imported a ton more 330 billion 330 billion in 2006 380 billion in 2007 almost 400 billion in 2009 so we're running almost a 300 billion almost a 300 billion trade deficit in 2008 relative to China and then in 2009 it goes down a little bit this looks like about a 260 billion trade deficit and that's really just because we imported we imported or the United States imported fewer goods and to large degree that was probably because of the u.s. the u.s. recession we're consumption in general when consumption in general slowed down so we would have bought fewer goods and services from pretty much anyone including ourselves or China now you can see that being offset in the financial account this to some degree tells the story it's doesn't give us the full story of the Chinese and this isn't just the Chinese government this is all Chinese ownership that they're that they are increasing their ownership of US assets and those assets they could be US Treasury notes and Bill these could be US stocks this could be US real estate but you can see each year and this is the increase Americans are buying assets in China five billion dollars in 2006 two billion in 2007 12 billion in 2008 18 billion in 2009 to some degree this is limited by a restrictions imposed by the Chinese government but you can see the Chinese are buying way more assets in the US and this really this really kind of is part of that picture of the Chinese especially the Chinese central government is buying US assets to do that they have to buy dollars with wen which keeps the dollar strong and allows their currency to stay weak which to some degree allows or to a large degree allows this balance of the trade deficit to stay where it is now I'll leave you with one conundrum to a large degree this is these numbers right here they are offsetting the trade deficit and especially in 2008 the Chinese bought way more US assets than actually even the trade deficit they more than made up for it but in 2009 you don't see them buying enough to make up for the trade deficit they bought a hundred forty three billion and actually on a net basis it'll probably be about 120 something billion which doesn't make up for the whole 260 billion so how did they still keep their currency pegged and the answer and we'll look at that into more detail is they don't have to directly buy US assets they could buy assets or they could buy currency from another country and that will put that will put upward pressure on that currency so let me put it over here China China could go and buy US currency or it could go to a another country and buy their currency country a and then country a is going to feel pressure its currency is going to go up in value and it doesn't want that because it would hurt its trade so then it might go and buy US assets to keep it devalued then that would not show up in that chart but we'll look at that in the next video this is Salman Khan of the Khan Academy for CNBC