'China is a focus. The dollar is a focus. I suppose both issues hit the nerves.' Citigroup economist Huang Yiping's comments perhaps summed up the currency market's reaction to a report released over the weekend by the Bank for International Settlements (BIS). Chinese banks are repatriating their overseas deposits on a massive scale, bringing money home in eight of the past 10 quarters, including a 'relatively large' US$9.1 billion in the second quarter this year, the quarterly review disclosed. This means that deposits placed overseas by Chinese banks dropped to US$70.4 billion at the end of the second quarter from $92.5 billion two years earlier, according to BIS, which monitors global money movement. The implication is that the 'surplus of funds placed in the international banking system by the Chinese banking sector that has been available for the financing of foreign government deficits is shrinking', BIS said. Official foreign exchange reserves in China increased to US$346.5 billion in the second quarter from $316 billion in the first, BIS noted, with the caveat that it is 'not clear to what extent these reserves were placed as deposits with overseas banks'. The day after the report from the Switzerland-based group of central bankers, the US dollar hit a new low against the euro. 'What it shows is that the largest reserves in US dollars - although it's quite small compared to US denominated assets in China - is an influence on the US dollar now,' says Emmanuel Pitsilis, principal at McKinsey & Co. A number of factors are at play, according to economists and observers. Morgan Stanley economist Andy Xie makes the point that this capital inflow has been on his radar for some time as US interest rates started to go down from 2000 and China banks began to lose an appetite for low bond yields. In turn, loan demand went up amid speculation of yuan revaluation. In a July report entitled 'Taking Advantage of Foreign Liquidity', Mr Xie noted that Chinese enterprises and households were not increasing US dollar deposits, as they had done previously, amid talk of yuan appreciation. 'What we see is as long as the US Federal Reserve doesn't raise interest rates and loan demand in China is strong, we are going to see that kind of stuff.' Banks in China are concerned that yuan appreciation would entail huge financial losses for them, Mr Xie stresses in his paper. Likewise, presumably among its clientele, there is a realisation that dollar loans are a better bet should revaluation take place - as a result, they are getting the banks to repatriate dollars. Mr Pitsilis notes: 'The issue again is there is speculation in the market ... that [China] may revalue the yuan. Pressure is coming from the US, there's data they can read about the trade surplus of China.' Coupled with this are strong economic results in China. 'This is just one more element in the same direction. I'm not sure if [repatriation of money] is just one more point pushing the [currency] market in the same direction.' The dollar has dropped almost 16 per cent against a basket of six currencies such as the euro and yen in the past year, according to Bloomberg. Chinese goods, as a result, became cheaper abroad, prompting political pressure in the US for the yuan to be allowed to appreciate. How long this repatriation to China continues, and at what pace, hinges on currency speculation, according to Citigroup's Mr Huang. 'It depends whether the currency expectation of a revaluation will continue,' he says. 'If yes, there will be similar behaviour.' He does wager that the rate of repatriation will come down. 'I think it's because the government is working hard to ease the pressure on revaluation. 'Then a perceived distortion in the exchange rate will be smaller. The incentive for rapid repatriation probably will continue down.' As the US presidential elections draw closer next year, the issue of revaluation is unlikely to simply fade away. This week, US officials announced that a Treasury group will hold talks next month with officials from China with the aim of convincing it to allow the yuan to be freely traded. It may be inevitable that the yuan floats, but the timing is less clear. Outlining prospects for Asia next year, Don Hanna, head of the Asian emerging markets team at Citigroup, noted yesterday the subtext in any yuan adjustment is that it is easier to get other currencies to follow suit. A more flexible yuan exchange rate will happen, 'but it's not going to get there that quickly'.