Pegging the yuan

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Pegging the yuan발음듣기

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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.발음듣기

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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.발음듣기

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And because of that, we saw an imbalance in the currencies.발음듣기

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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.발음듣기

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Now, that's OK if everyone wanted to have balanced trade, but what if the Chinese government didn't want that.발음듣기

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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.발음듣기

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We want to export more to the United States than we import from them.발음듣기

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We want export-led growth.발음듣기

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So they don't like the dynamic that they saw, they did not like the currency, they did not like the Yuan getting expensive.발음듣기

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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.발음듣기

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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.발음듣기

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And, I guess the more sinister view is also so that the United States' industrial base gets depleted.발음듣기

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That they keep manufacturing things cheaper and cheaper and cheaper, and then United States manufacturers can't compete.발음듣기

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And we'll talk about this in more videos, it's not it's not clear that it's 100% one-sided.발음듣기

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There's actually some benefits that the United States also gets from this, and we'll discuss that more.발음듣기

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It's a little bit more involved.발음듣기

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So how could they do this?발음듣기

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Let's just say that the Chinese government wants this reality, and they want this reality frozen.발음듣기

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They do not want the reality where the trade balances.발음듣기

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How could they intervene in currency markets so that this doesn't change?발음듣기

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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.발음듣기

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But how do you get both?발음듣기

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How do you have your cake and eat it too?발음듣기

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How do you get more goods being shipped to the United States than back to China without the Yuan appreciating?발음듣기

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And the way you do that, there's the Chinese government, or maybe in particular we could talk about the Chinese Central Bank.발음듣기

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The Chinese Central Bank, which is a part of the Chinese government can say, hey, to keep our Yuan devalued, we will print money.발음듣기

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So let me draw the Chinese Central Bank.발음듣기

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Let me do this in a new color.발음듣기

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And what they do, they can actually just print money.발음듣기

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So we had this scenario that I had outlined in the last two videos where we had this imbalance.발음듣기

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There was demand for CNY 1,000, but only supply of CNY 500.발음듣기

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So what they can do is just equalize this.발음듣기

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They could just print CNY 500 and then try to convert that into dollars.발음듣기

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So what just happened?발음듣기

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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.발음듣기

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So there's demand for CNY 1,000.발음듣기

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Before the Chinese Central Bank got involved, there was only a CNY 500 supply.발음듣기

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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.발음듣기

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We literally can just print it, and then they will convert what they printed into dollars.발음듣기

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So just like that, you now have a balance of supply and demand.발음듣기

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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.발음듣기

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So if they were to do this, the currency wouldn't change.발음듣기

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The exchange rate would change.발음듣기

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The supply and demand of the two currencies would be equal.발음듣기

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Now, and that would work and frankly that's what they have been doing for some time now.발음듣기

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But there's one kind of catch here.발음듣기

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The whole time that they're doing this, what is happening?발음듣기

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Well, they keep shipping more to the United States then the United States is shipping to China.발음듣기

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These guys keep having to print Yuan and buy dollars with those Yuan in order to keep the Chinese currency cheap.발음듣기

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So these people are going to keep accumulating dollars.발음듣기

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They just keep printing Yuan and then they just keep accumulating dollars.발음듣기

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Let me draw that over here, so the Chinese Central Bank just starts accumulating many, many dollars.발음듣기

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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.발음듣기

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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.발음듣기

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So they have to just keep on doing it, they can't even stop doing it.발음듣기

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They have to keep doing it in order to keep the trade balance the way it is.발음듣기

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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.발음듣기

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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.발음듣기

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