The State Administration of Foreign Exchange (SAFE) predicted Wednesday that last year's "double-surplus" situation in its current and capital accounts will continue. Considerable growth in both surpluses last year led to China's largest-ever increase in foreign exchange reserves.

SAFE also reported that the renminbi exchange rate will remain "basically stable"?this year.

With speculation high that China may allow the renminbi to appreciate, the nation's forex reserves at the end of last year were up 40 percent year-on-year to US$403.3 billion.

The huge rise came 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 in which unreported transactions are recorded, SAFE said Wednesday.

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

Commodities trade, at US$44.7 billion, was the biggest portion of last year's current account surplus, but edged up only 1.0 percent from the previous year as growth of imports, driven by strong domestic demand, outpaced exports.

The surplus in current transfers showed the fastest growth under the current account, jumping 36.0 percent to US$17.6 billion, "far faster than the average of past years," according to SAFE.

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

Under the capital and financial account, portfolio investment 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 borrowing growth 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 Center.

But the strong desire of domestic banks to lend, 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 leapt 39.2 percent year-on-year in the first quarter of 2004, while foreign trade showed 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 while speculative funds are no more than a small fraction.

"We will remain on the 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)