relatively stable and floated within a narrow band. However, the USD-pegged system forced price adjustments domestically in different directions, which made the exchange rate in real term still fluctuate with the USd to some degree From 1994 to 2003, the nominal and real effective exchange rates of the renminbi vis-a-vis other currencies as a whole rose by 6.7 per cent and 31.5 per cent In nominal terms, the currency strengthened by 5. 1 per cent and 10.3 per cent against the USD and the Japanese yen, respectively, while the real appreciation was 20. 1 per cent and 59.1 per cent considering inflation differentials( Guo Shuqing, 2004) 3 A Few Findings from the evolution of the Exchange rate regime From the above fact, we find that the PRC's exchange rate sy stem evolved with the reform and opening up policy, and the renminbi exchange rate was driven by pressures from the market as well as by external factors Before the integration of the official rate and swap rate, the renminbi exchange rate was gradually driven downward by the excessive demand for foreign currencies. It is clear that every sharp adjustment of the exchange rate coincides with extensive reform and opening up policies, which led to high economic growth, high inflation and the trade imbalance After the departure from the dual track exchange rate system, the nominal exchange rate remained relatively stable, but the real exchange rate floated upward and downward at a surprising pace compared to the PrC's trad ing partners. Through changes in relative prices between the PRC and the rest of the world the renminbi's average exchange rate experienced enormous fluctuations. It appreciated by more than 20 per cent in the last 10 years, or nearly 60 per cent if inflation is taken into account The response of the exchange rate to the market supply and demand is asymmetric. For example, before the unification of the exchange rate in 1994, the demand for foreign currencies put lasting downward pressure on the renminbi. This was because the demand for foreign currencies was high but the central bank could not satisfy it, leading the price of foreign currencies to rise. However, when the supply of foreign currencies exceeded the demand, the central government was able to absorb excessive foreign currencies by printing paper money if it wished to do so and was ready to take the inflation risk. The derlying factor behind this asymmetry is that the government has full authority to issue domestic currency but no right to issue foreign currencyrelatively stable and floated within a narrow band. However, the USD-pegged system forced price adjustments domestically in different directions, which made the exchange rate in real term still fluctuate with the USD to some degree. From 1994 to 2003, the nominal and real effective exchange rates of the renminbi vis-a-vis other currencies as a whole rose by 6.7 per cent and 31.5 per cent. In nominal terms, the currency strengthened by 5.1 per cent and 10.3 per cent against the USD and the Japanese yen, respectively, while the real appreciation was 20.1 per cent and 59.1 per cent considering inflation differentials (Guo Shuqing, 2004). 3 A Few Findings from the Evolution of the Exchange Rate Regime From the above fact, we find that the PRC’s exchange rate system evolved with the reform and opening up policy, and the renminbi exchange rate was driven by pressures from the market as well as by external factors. Before the integration of the official rate and swap rate, the renminbi exchange rate was gradually driven downward by the excessive demand for foreign currencies. It is clear that every sharp adjustment of the exchange rate coincides with extensive reform and opening up policies, which led to high economic growth, high inflation and the trade imbalance. After the departure from the dual track exchange rate system, the nominal exchange rate remained relatively stable, but the real exchange rate floated upward and downward at a surprising pace compared to the PRC’s trading partners. Through changes in relative prices between the PRC and the rest of the world, the renminbi’s average exchange rate experienced enormous fluctuations. It appreciated by more than 20 per cent in the last 10 years, or nearly 60 per cent if inflation is taken into account. The response of the exchange rate to the market supply and demand is asymmetric. For example, before the unification of the exchange rate in 1994, the demand for foreign currencies put lasting downward pressure on the renminbi. This was because the demand for foreign currencies was high but the central bank could not satisfy it, leading the price of foreign currencies to rise. However, when the supply of foreign currencies exceeded the demand, the central government was able to absorb excessive foreign currencies by printing paper money if it wished to do so and was ready to take the inflation risk. The underlying factor behind this asymmetry is that the government has full authority to issue domestic currency but no right to issue foreign currency