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Firm yuan value lure funds back
( 2003-05-26 09:41) (1)

A newly-released foreign exchange figure that reflects statistical lapses and irregular transactions indicated a change in trends in capital flow between China and the rest of the world.

The category for errors and omissions in China's balance sheet of international payments in 2002, released earlier this month, turned black after being in the red for the previous 17 years.

The category, the figure in which read US$7.8 billion last year, is closely related to capital flows that regulators are unable to track. Therefore, the shift indicated capital outflow from the country has been mitigated, analysts agreed.

And the decrease in capital outflow, in turn, is proof of the appeal of the robust Chinese economy and strong local currency, the analysts said.

"This change is worth close study, especially when the category had been in red for so many years,'' said Qin Chijiang, former head of the People's Bank of China's research bureau.

"My feeling is that it was brought about by a combination of favourable conditions, such as the strength of the renminbi, China's vibrant economy and stable political situation.''

The balance sheet of international payments, like any other balance sheet, consists of two lines -- credit and debit -- which can, in a simple way, be understood as money in and money out.

The items in the two lines accumulated and the gap between the two sums should be the country's reserves or deficit in international payments. In China's case, it has turned out to be reserves in each of the past twenty years.

The reserves or deficit figure obtained by this way is usually different from the actual reserves or deficit. The difference between the calculated figure and the actual figure was caused either by statistical mistakes or by transactions that take place outside of the official record system or, in most cases, or by both, said Qin, now deputy secretary-general of China Society of Finance.

In China's case, during the past years, a major part of the off-record transactions was money sent out evading official supervision, he said.

Another Beijing-based forex expert, who asked to be anonymous, echoed Qin. He explained that if the difference between the calculated reserves and the actual reserves figure was caused by statistical lapses alone, the errors and omissions category should not always be negative or positive.

It should be negative for some years and positive for the other years because technical mistakes should happen both ways, he said.

"But what we saw in the many years prior to last year was that it was negative all the way down and that means something,'' the expert said, adding that the capital flight was behind negative figures.

Now it comes to the positive side and that, at least, indicated that capital outflow has been moderated, he said.

The capital outflows in the 1990s was mainly attributed to a relatively weak yuan.

This was especially true in 1998, when the spread of a financial crisis in Asia triggered fears that the renminbi could be devalued.

But as the possibility of a yuan depreciation diminished, capital outflow also eased.

In parallel, the figures in errors and omissions category, though all negative, dwindled year by year, from US$16 billion in 1998 to US$14 billion in 1999, US$11 billion in 2000 and US$5 billion in 2001.

The errors and omissions category is not alone in proving this trend.

The surplus in officially-recorded money remittances, which stood at US$13 billion last year, was much higher than the level of the previous years. A surplus was also registered in the category of trade credit. The surplus, which was US$3.9 billion last year and represented a 58 per cent increase over 2001, can reflect enterprises' eagerness to move capital back home, according to an analytical report by the State Administration of Foreign Exchange.

In addition to a rock-solid yuan and vibrant and sound economic performance, the higher interest rate of the renminbi over the US dollar also persuaded companies and individuals to send money back and convert them into local currency, said San Feng, an analyst with the State Information Centre.

The US dollar's interest rate in domestic banks was higher than that of the renminbi in most of the period between 1996 and 2001.

But all that changed last year. Now the benchmark one-year time deposit interest rate for the yuan stands at 1.98 per cent, whereas the rate for US dollar at the Bank of China is 0.81 per cent.

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