Question

China had a $214 billion overall current account surplus in 2012. Assuming that China's net debt forgiveness was zero in 2012(its capital account balance was zero) by how much did Chinese purchases of financial and real assets abroad exceed foreign purchases of Chinese financial and real assets?

Answer 1

In order to offset the current account surplus, China would require to have a deficit in capital and financial account. Given the capital account having a zero balance, the surplus can only be achieved if China’s purchases of financial and the real assets abroad exceeded the foreign purchases of assets of China. The surplus foreign currency thus so generated by the trade surplus would either have to go to purchase the foreign assets, or need to be accumulated as official reserves in an amount which will be equal to the current account surplus. Thus, the financial account would be a deficit of $214 billion.