A Note on Teaching the Yuan-Dollar Market vis-a-vis China's Dollar Holdings

The economic relationship between China and the U.S. is sufficiently ubiquitous in the media that few students will be unacquainted with the issue. Connecting the dots between China’s export-led growth, current account surpluses, currency peg, and its reserves (whether held by the central bank or in a sovereign wealth fund) is a key task in any undergraduate course that touches on the global economy. The present note proposes a method for understanding the relationship between two items in this list, the currency peg and reserves. Maintaining exchange rates different from equilibrium (as China has done) has consequences for the quantities of currencies that have to be bought and sold. The dollars accumulated have to be held in some form – a fact which also has had far reaching consequences for the global economy. The paper proposes using currency offer curves to facilitate teaching fixed exchange rates to undergraduates. Our method helps students “see” the process of pegging the yuan and the resulting accumulation of dollars.