The Bank of China branch in Sanlihe, a district full of government offices in west Beijing, attracted long queues last week as people rushed to open foreign-currency accounts. The rush came after the government raised interest rates on such accounts to more than double that of yuan accounts. 'We had three times as many customers as before the increase,' said a bank official. 'Some people opened new accounts and others put money from accounts into new ones.' With the increase, which took effect last Monday, a one-year deposit in US dollars pays 5.25 per cent, against 2.25 per cent for the same period in yuan, with a current account paying 2.1 per cent, against 0.99 per cent for yuan. This wide gap between the two rates is the result of the divergence between the economies of the mainland and the outside world. In an effort to stimulate industrial growth and personal consumption, the central bank has cut yuan interest rates seven times since 1996, just as interest rates for the US dollar and the euro were going up. When the Federal Reserve raised rates in September and December last year, the central People's Bank left US dollar rates in the mainland unchanged. But after the increase of May 16, it felt it could delay no longer and raised the rates here by about 0.5 percentage points. 'If we did not increase our foreign currency rates in a timely fashion, it would lead to an outflow of capital and a large amount of our foreign currency abroad remaining offshore,' said the Economic Daily. 'So we had no option but to adjust the rates.' This is one of several factors the People's Bank considered in its decision. While too wide a spread with foreign rates leads to capital flight, a wide spread with domestic rates leads to people changing yuan for foreign currency, which in turn puts downward pressure on the yuan. The bank decided that this was desirable, because a rising yuan is not good for exports. On May 24, the yuan hit a record closing 8.2764 against the dollar on the highly regulated market in Shanghai, its highest level since the mainland unified its dual exchange rates in 1994. A flow of yuan into dollars will ease this appreciation. The bank also felt comfortable because the country has abundant national reserves and yuan deposits. At the end of March, foreign currency reserves reached US$156.8 billion, the second-highest in the world after Japan, and individual deposits in the banks reached 6.25 trillion yuan (about HK$5.81 trillion), nearly double the 3.85 trillion at the end of 1996. The reserves almost match the country's foreign debt, which reached US$151.83 billion at the end of last year, of which US$136.65 billion is medium- and long-term debt. The central bank knows that it cannot stop capital flight but it does what it can to keep within the country the foreign exchange held by its citizens and companies. Firms need approval to hold foreign-currency accounts. No one knows how much foreign money there is in private hands in the mainland. One official newspaper last week said individuals held US$30 billion in foreign currency in bank deposits, with a substantial amount held at home by people who do not want to keep it in a bank for fear that they will not be able to use it as they wish. More and more banks offer foreign-currency accounts, with free deposit and withdrawal and no questions asked about where the money came from or what you plan to spend it on. Mainlanders who go abroad can carry a maximum of US$1,000, together with a certificate from the Bank of China saying that they are allowed to carry this money. To carry more than that needs special approval from the State Administration of Foreign Exchange. Those who can, get round the restrictions. Some landlords demand that foreigners pay their rent in foreign currency directly into offshore bank accounts. Many companies use false invoices on goods they import into or export from the mainland, enabling them to put the difference into foreign banks. Estimates of capital flight run into tens of billions of dollars a year. The mainland's international balance of payments account for last year, published in mid-May, shows a figure of US$14.8 billion for errors and omissions, the amount that official data was unable to trace. The real figure will be substantially higher than that. With entry into the World Trade Organisation expected this year, a new factor will enter the equation. Beijing has agreed to allow foreign banks full market access to mainland companies and individuals within five years. Then people will not have to find ways round the law but will be able to hold US dollars at a mainland Citibank or HSBC branch.