Components of Capital Account Question interested, exchange, existing, payments, provided

joehogue

Larry Goren, CFA, is an economist for the Federal Reserve Bank. He is interested in using a country’s balance of payments as a forecasting tool in determining exchange rates. He notices that China has a high current account balance resulting in a large surplus in its balance payments. It can be implied that:
A) China received a great deal of income flows from the sale of trade merchandise and services and payments on its existing investments.
B) China provided a great deal of financial assistance to other nations.
C) China’s international currency reserve holdings have increased.
Your answer: A was correct!
A large increase in China’s current account can only mean that it has received income from the sale of its trade merchandise (exports) and payments on its existing investments. Both remaining transactions affect the other elements of the balance of payment accounts. If China lends financial assistance to other nations, it shows up in its capital account and if its foreign currency reserves increase, it shows up in its official reserve account.
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I have an issue with the phrase, “If China lends financial assistance to other nations, it shows up in its capital accountIf China lends financial assistance to other nations, it shows up in its capital account.” Don’t gifts show up in the currenct account and cause a deficit there?

kseniaru

i looked this up in cfai econ section and couldnt find mention of the issue about less than a year financial assistance of more than a year being capital account and less than a year being current account.
is this correct? where can i find this?

joemoran

So to summarize:
a) If China gives a gift (unilateral transfer), it causes a current account deficit in China and a currency account surplus in Country B.
b) If China provides financial assistance (this assumes there will be repayment made) for OVER ONE YEAR term, it causes a CAPITAL account deficit in China and a CAPITAL account surplus in Country B.
c) If China provides financial assistance (this assumes there will be repayment made) for UNDER ONE YEAR term, it causes a CURRENT account deficit in China and a CURRENT account surplus in Country B.
Is all that accurate?