Chinese Central Bank buying treasuries발음듣기
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Chinese Central Bank buying treasuries
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Let's review everything we've done in the last few videos and then take it a few steps from there.발음듣기
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So let's say we have a reality that right now and this isn't the actual exchange rate, but I'm just using these numbers because they're nice simple numbers - the current exchange rate is 10 yuan per U.S. $1.발음듣기
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And now we're in a reality where the Chinese Government, the Chinese Central Bank, wants to keep this pegged so it wants to lock this.발음듣기
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But the reality is, more is being sold to the U.S. more is being exported from China to the U.S. than the other way around.발음듣기
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And let's say at this exchange rate right over here, you have goods coming from China to the U.S.발음듣기
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So these are Chinese goods, and then we are paying for those Chinese goods in dollars and those dollars are being sent to China.발음듣기
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Let's say that $100 sent to China for the goods and this is really just a summary of what we saw in the last few videos.발음듣기
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And let's say, on the other side of this equation, some goods are sent from the U.S. to China.발음듣기
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Some are exported, so U.S. goods are exported to China, and then we sell them in China and then we get some yuan in return that go back to the United States.발음듣기
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And, of course, the reality is that the money seldom is actually sitting on a ship going across the Pacific.발음듣기
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The actual exchanges are essentially happening on the internet not really in any physical location, but this is a good way to visualize it.발음듣기
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So if all of these people were just convert, and you actually don't know what the equilibrium price would be,발음듣기
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because the demand changes depending on what the price is in each of the countries, but if you really wanted to convert these $100 that the Chinese producer gets into yuan at 10:1,발음듣기
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you would need - so we're going to assume that this PEG is what at least the Chinese Government wants.발음듣기
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Now this producer, the U.S. producer, only has - let me do it in a different color and I should put the quotes around needs, not around the yuan.발음듣기
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Now this U.S. producer only has 500 yuan to convert into dollars and we've seen this multiple times.발음듣기
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And we could do the exact same argument for the dollar that the demand for dollars is much lower than the supply for dollars.발음듣기
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At this exchange rate, if we assumed a PEG this would only be $50 that we need to convert into, while there's $100 of actual supply.발음듣기
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And if we had a floating exchange rate that would increase the demand for yuan, and then this number would go down, or another way to view it, either that number goes down or this number over here goes up.발음듣기
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You could say the yuan would become more expensive which means maybe it's 9 yuan per dollar or 8 yuan per dollar, or it could go the other way.발음듣기
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Now, in order for this lock and for this PEG to occur we saw in the last video that the Chinese Central Bank needs to intervene.발음듣기
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So what he does or what they do is they say OK, $50 of this $100 dollars can be essentially traded for these 500 yuan.발음듣기
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Let me draw a two-way arrow there. $50 goes to the American producer and then the 500 yuan go to the Chinese producer in exchange for that $50.발음듣기
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But essentially, there will only be $50 to convert into the yuan and then the other $50 will go to the Chinese Central Bank.발음듣기
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Let me draw the Chinese Central Bank, and they will just print yuan and give another 500 yuan.발음듣기
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All I'm showing is to make up for the lack of supply of yuan, they needed 1,000 yuan, there's only 500 yuan to convert.발음듣기
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In order to make that up, the Chinese Central Government prints the extra Chinese currency and buys dollars with it.발음듣기
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It is sucking up extra dollars so that the supply for dollars isn't so high that it weakens or so that the yuan strengthens.발음듣기
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In order to maintain this currency PEG while there is this trade imbalance, the Chinese Central Bank keeps printing yuan and they keep accumulating dollars.발음듣기
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And if they ever stop accumulating dollars, so it's not like they can just hold the dollars they have and the PEG will hold.발음듣기
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Not every day, maybe sometimes when it won't fluctuate on their own, but if the yuan is getting expensive, they actually maintain a range, and they will buy dollars.발음듣기
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It allows you to buy other things that could give you some income or could give you some value.발음듣기
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It wants to go to the safe dollar-denominated asset, which means that you would buy it in dollars, and if it produces interest, the interest would be in dollars.발음듣기
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And it's also doing this on a massive, massive scale, in the hundreds of billions of dollars, and actually the Reserve is in the trillions of dollars, so it's on a massive scale.발음듣기
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So they can't just go buy a random company's stock, one that won't be safe, but also they would just drive the price up to infinity if they used this many dollars.발음듣기
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So it has to be a very liquid asset, one that has a very deep market where the people trading in that market, it really is in the tens and hundreds of billions of dollars.발음듣기
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And there's really only one asset that meets those requirements, and that's U.S.. Treasuries.발음듣기
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So what the Chinese Central Bank does with all of these excess dollars, it essentially buys U.S. Treasuries.발음듣기
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Well, not gives away, it sends the dollars to the people who are holding the U.S. Treasuries, and then it gets U.S. Treasuries in return.발음듣기
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These bonds, these Treasury bonds or these treasury bills that they're getting, these certificates, are essentially - in fact, they are - IOUs from the U.S.A, not to get cheesy with the acronyms.발음듣기
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These are literally IOUs from the U.S. Government, and the U.S. Government will pay interest.발음듣기
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They are essentially - so just to make it all clear of what's going on, they're printing money.발음듣기
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They're using those dollars to go out into either the open market or even directly from the Treasury, from the U.S. Treasury, and they are buying U.S. Treasuries, which essentially means that they are lending this money to the U.S. Government.발음듣기
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Now, I'll leave you there in this video, and maybe you want to think about it a little bit before you even watch the next one.발음듣기
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What happens if you have this big holder of U.S. dollars, this huge holder of U.S. dollars going out there and buying Treasuries and being willing to lend money to the U.S. Government?발음듣기
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