China reported considerably larger surpluses on both last year's current and capital accounts Wednesday, which had led to its biggest-ever annual increase of foreign exchange reserves.

The State Administration of Foreign Exchange (SAFE) also predicted the "double-surplus" situation on current and capital accounts will continue, and said the renminbi exchange rate will remain "basically stable" this year.

With speculation high that China may soon allow the renminbi to appreciate, the nation's foreign exchange reserves rose by 40 percent on a year-on-year basis to US$403.3 billion at the end of last year, the authorities said earlier this year.

That huge forex reserve rise had come from a US$45.9 billion current account surplus, up 30 percent from 2002, a US$52.7 billion capital account surplus, up 63 percent year-on-year, and US$18.4 billion recorded under errors and omissions, a category recording unreported transactions, SAFE said yesterday.

Last year was the second in recent years when China reported a net inflow under the errors and omissions, which many believed was a sign of the inflow of speculative funds.

Commodities trade was the biggest portion of last year's current account surplus - at US$44.7 billion - but was only a mild 1 percent rise from the previous year as growth of imports, driven by strong domestic demand, outpaced exports.

Current transfers reported the fastest growth of surplus under the current account. The surplus jumped by 36 percent to US$17.6 percent, "far faster than the average of past years," SAFE said.

Remittances from overseas Chinese, an item regulators said was difficult to monitor, were the major force behind the current transfer surplus, the administration said.

Under the capital and financial account, the administration underlined portfolio investment, which shifted from a deficit in 2002 to a US$11.4 billion surplus last year as domestic financial institutions trimmed holdings of foreign securities to tap into growing borrowing demand at home.

"Expectations that the renminbi will appreciate played a significant role (in last year's surpluses)," said Wang Yuanhong, a senior analyst with the State Information Centre.

But the strong lending desire of domestic banks, partly to cater to businesses' borrowing needs and partly to build up total loans and therefore reduce their non-performing loan ratios, was also a major reason for the shift in portfolio investment, he said.

China's forex reserves jumped by 39.2 percent on a year-on-year basis in the first quarter of this year, while foreign trade reported a gross deficit and foreign direct investment rose slightly, a situation analysts said may suggest a faster inflow of speculative funds.

"The trend is continuing this year, and probably at a faster pace," Wang said.

A SAFE spokesman last week dismissed some foreign media reports that large amounts of speculative funds are flowing into China, insisting that most of the inflows are legitimate and speculative funds are no more than a small fraction.

"We will remain on alert and closely monitor cross-border capital flows, and will be ready to strike, at any time, at activities that break China's foreign exchange administration rules," he said.

Foreign countries like the United States have complained that the renminbi is unfairly undervalued and has cost many jobs for its trading partners.

(China Daily April 29, 2004)