Finance and capital markets
- 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
Data on Chinese US balance of payments
Learn about the balance of payments (BOP) by taking a look at the BOP for the United States in 2006 and how it relates to China's currency. Created by Sal Khan.
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- At about3:50, Sal mentions China investing in other countries which increases the value of the currency of the country being invested in. Isn't that a good thing? I understand how it is good for China's currency to remain "weak", but is that desirable for all countries other than the U.S.?
Also, how could a country, whose currency's value has increased, change their market to reflect the increase in value of their currency and why(in this example) do they not?(4 votes)
- In New Zealand (where I live) a lot of our country's money is made by exporting goods. If we sell an item in the U.S. for US$ and then convert the US$ into NZD$ we will get more NZD$ if we have a weaker currency. For example, if we sell an item for US$10 and 1 NZD$ is worth US$0.70 when we convert the money we will have NZD$14.29 but if 1 NZD$ is worth US$0.90 we will only get NZD$11.11
If a country's main source of income is exporting goods then it is more desirable to have a weak currency.
I would have to think about this some more to be sure, but I think that the only reason to have a strong currency is when you are importing goods, so you want a stronger currency than a country that you are importing goods from and a weaker currency then a country exporting goods to.
Hope this helps and that I haven't been to confusing. :)(7 votes)
- Does the US buy foreign bonds in an attempt to keep trade imbalances as well? Salman indicates that other countries aside from China do this at3:50, so it stands to reason the US would do this.(3 votes)
- Why other developing/ under developed countries not following Chinese pattern of printing money to buy foreign assets/ currencies? This pattern can be followed by all countries doing more export with USA than import? Is it leading up to something similar to Thai banking crisis? How is this not impacting inflation in China?(4 votes)
- If China is printing so much Yens in order to buy US dollars or any other currencies. Why the chinese inflation is not growing so much?. I read some statistics and the inflation is always between 1% and 4% (not so dramatic inflation). Is it happening because such amount of printed Yens are in correlation with the growth of China, and so, even though the supply of Yens increased, let`s say X%, the demand also is increasing in same percentage of X% (because they are growing)?(2 votes)
- It is partly because China's growth is nearly as fast. However, many claim that China is also hiding the real inflation rate. How they do this is explained by Sal in the next video.(3 votes)
- What are some goods that America sells to China? Software maybe some food? Machinery?(2 votes)
- From what I know, there is a large demand for American software in China. :)(1 vote)
- Small note.
I believe the purchasing of chinese investments are outflows of money, and would be represented by a negative number in the BoP, so doesn't row 40 say that Americans are selling their Chinese investments?(1 vote)
- you are correct. It is specified in the leftmost coulmn as "(increase/financial outflow(-)" and no it doesnt mean amercans are selling(1 vote)
- So why is the US$ not appreciating madly in comparison to the rest of the world?(1 vote)
- why do you think it should be doing that?(1 vote)
- So What happens when a country invades / captures another economy? For example what happened to the the Deutschmark and Yen after WWII?(1 vote)
- they had lost everything and had to start again from scratch like with the eu.(1 vote)
- In regards to your question at3:30(how were they still able to keep their currency PEGed), your answer given in the video was not the first thing to come to mind. The first idea I thought about deals specifically with them purchasing certain assets, such as stocks, that can actually appreciate in value, hence increasing the amount of (and their possesion of) US dollars, which would then allow them to continue on with the purchasing of T-bonds and such to keep the interest rates (for us) down, which would then lead to the consumers purchasing more of "the microwaves." Also, it can be seen as this (in my mind): it does not look like their foreign owned assets make up for the import of their goods because we cannot see their UNREALIZED GAINS, but once they convert this to REALIZED GAINS in the future, we will be able to come back to that year and do the math, which should even out.
So....Am I thinking about this correctly? And if not, where have I gone wrong in my thinking?(1 vote)
- what is the term yen? it doesn't say much in the video(1 vote)
I used 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 this video is to actually look at some of the real numbers. So this is from the US Bureau of Economic Analysis, bea.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 really tells us the imports verses exports. And this over here is the capital account, sometimes called the financial account, depending on how you are accounting for it. And this tells us about 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 we did export some things to China. $72 billion worth in 2006, this is in millions of dollars. So $72,000 is $72 billion. Increased to $85 billion, $95 billion. Stayed at $95 billion in 2009. 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 trade deficit in 2008 relative to China. And then in 2009 it goes down a little bit. This looks like about $260 billion trade deficit. And that's really just because we imported, or the United States imported, fewer goods. And to a large degree that was probably because of the US recession where 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 done give us the full story, of the Chinese. And this isn't just the Chinese government. This is all Chinese ownership, that they are increasing their ownership of US assets. And those assets, they could be US Treasury notes and bills. 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. $5 billion in 2006, $2 billion in 2007, $12 billion in 2008, $18 billion in 2009. To some degree this is limited by restrictions imposed by the Chinese government. But you could see the Chinese are buying way more assets in the US. And 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 yen, which keeps the dollar strong and allows their currency to stay weak, wish 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 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 $143 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 upward pressure on that currency. So let me put it over here. China could go and buy US currency. Or it could go to another country and buy their currency, country A. And then country A is going to feel pressure. It's currency is going to go up in value. And it doesn't want that because that would hurt its trade. So then it might go and buy US assets to keep it devalued. And 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.