Synced passwords are passwords you have saved and configured to be synced on one of your synced Chrome browsers. The number also includes entries for the websites for which you told Chrome not to store any passwords for. Passwords are always encrypted.
Update: in the Advanced Sync Settings, you must choose between:
"Encrypted synced passwords with your Google credentials" and
"Encrypt all synced data with your own sync passphrase"
I was exploring some Password options in Google Chrome and I found that to view your Chrome-stored passwords, you must enter your Windows Password. That's right, your Windows Login credentials.