The People's Bank of China, the nation's central bank, said on February 20 that foreign exchange savings deposits fell sharply to US$85.3 billion at the end of January.

This year-on-year decline of 4.9 percent, going against the trend of years of rapid growth, comes as depositors reckon that the renminbi will appreciate in the near future.

The dip was even greater than last October's 1.9 percent fall.

The growth of forex savings was normally rapid in recent years as forex assets owned by Chinese depositors expanded, but started to slow down early last year.

"Expectations that the renminbi will soon appreciate remain a major factor," said Wang Yuanhong, a senior analyst at the State Information Centre. "Many people keep converting their forex assets into renminbi."

Partly as a result, renminbi savings deposits continued to rise rapidly. Total savings, of which forex account for a small fraction, jumped by an annualized 18.6 percent to 11.63 trillion yuan (US$1.4 trillion) at the end of last month, said the central bank.

Speculation was high last year that the value of the Chinese currency would soon increase, running counter to official statements reiterating the Chinese Government's determination not to revalue the currency in the near future, but gradually improving the exchange rate forming mechanism instead.

Rumours were rife in recent weeks about an immediate appreciation in the renminbi, as some foreign financial institutions predicted the currency may appreciate by 5 percent in three months.

The ongoing rebound in real estate shares is a clear indication of the current situation, Wang pointed out, noting that shares were largely expected to edge down as the authorities have openly expressed concerns that the sector is overheating.

"People believe that when an economy grows like the Chinese economy has, its currency has got to get stronger," he said.

The Chinese economy grew by a robust 9.1 percent last year, despite worries that this momentum may be undermined by over investment in some sectors.

And there is still pressure from a number of foreign countries, mainly the United States, which claim the renminbi is undervalued, giving Chinese exports an unfair competitive edge, Wang said.

Forex loans continued their fast growth as businesses increasingly opted to take on forex liabilities, putting some pressure on banks in managing their funds, despite the continued decline in forex savings.

Outstanding forex loans at both Chinese and foreign banks operating here surged by a year-on-year 27.8 percent to US$132.9 billion.

Analysts largely agreed that the trend is unlikely to lead to any serious short-term problems, as forex assets remain a small part of total bank assets and the use of forex remains limited by the partial convertibility of the renminbi.

(China Daily February 22, 2004)