details see the website of China Securities Regulatory Commission, or CSrC http://www.csrc.gov.cn/).Weprovideadetailedanalysisofthestatusandproblemsofthestock market in Section Iv below The exchange rate policies regarding the Rmb have gone through three regimes since 1949 First, during the period 1949-1978, all demand and supply(for firms, individuals, and government agencies)of foreign currency were collected and distributed through the central government and PBOC under official rates. Second, between 1978 and 1994, a retention system among SOEs was introduced at the provincial level so that provincial authorities and enterprises receiving and requesting foreign currencies(via import/export)were entitled to retain a certain proportion of the foreign currencies conditional on their fulfillment of export quotas assigned by the central government. a dual" exchange system was introduced so that official exchange rate and market exchange rates coexisted, although the latter was not freely floatable; a special currency, the" RMB Exchange"was issued and circulated mostly among foreigners(who brought foreign currencies to China). The retention and central planning regime was replaced by a more market-based system in 1994, which is still operating at present. The exchange rate has been exclusively pegged to the US Dollar and can fluctuate in a small range(around US$1= RMB 8.28 )under state regulation and monitoring. Interbank foreign exchange trading is also allowed, while the rmB Exchange currency stopped circulation. Individuals and enterprises have much more freedom in terms of holding short term), although the(legal) currency flows must go through the BOC. At the same time, e o foreign currencies for various purposes(so that the current account can fluctuate significantly in the capital account is still not freely convertible Following the Asian Financial Crisis in 1997, financial sector reform has focused on state owned banks and especially the problem of NPls (the China Banking Regulation Committee was lso established to oversee the banking industry ). We will further discuss this issue in Section Ill Finally, China's entry into the WTO in December 2001 marked the beginning of a new era. Since the eventual opening of the capital account and adopting a floating exchange rate are required by the WTO, we should expect to see increasing competition from foreign financial institutions and frequent and large scale capital flows. Perhaps we can even some witness dramatic changes and intriguing events within China's financial system shortly after December 2006 (the end of the five- year transition period after joining the WTO). Finally, institutional investors began to emerge in the late 1990s although their scale and importance in the financial system was and still is limited. The first two mutual funds( Guo Tai and Nan Fang)were established in 1998. There are 46 fund9 details see the website of China Securities Regulatory Commission, or CSRC, http://www.csrc.gov.cn/). We provide a detailed analysis of the status and problems of the stock market in Section IV below. The exchange rate policies regarding the RMB have gone through three regimes since 1949. First, during the period 1949 – 1978, all demand and supply (for firms, individuals, and government agencies) of foreign currency were collected and distributed through the central government and PBOC under official rates. Second, between 1978 and 1994, a retention system among SOEs was introduced at the provincial level so that provincial authorities and enterprises receiving and requesting foreign currencies (via import/export) were entitled to retain a certain proportion of the foreign currencies conditional on their fulfillment of export quotas assigned by the central government. A “dual” exchange system was introduced so that official exchange rate and market exchange rates coexisted, although the latter was not freely floatable; a special currency, the “RMB Exchange” was issued and circulated mostly among foreigners (who brought foreign currencies to China). The retention and central planning regime was replaced by a more market-based system in 1994, which is still operating at present. The exchange rate has been exclusively pegged to the US Dollar and can fluctuate in a small range (around US$1 = RMB 8.28) under state regulation and monitoring. Interbank foreign exchange trading is also allowed, while the RMB Exchange currency stopped circulation. Individuals and enterprises have much more freedom in terms of holding foreign currencies for various purposes (so that the current account can fluctuate significantly in the short term), although the (legal) currency flows must go through the BOC. At the same time, the capital account is still not freely convertible. Following the Asian Financial Crisis in 1997, financial sector reform has focused on state￾owned banks and especially the problem of NPLs (the China Banking Regulation Committee was also established to oversee the banking industry). We will further discuss this issue in Section III. Finally, China’s entry into the WTO in December 2001 marked the beginning of a new era. Since the eventual opening of the capital account and adopting a floating exchange rate are required by the WTO, we should expect to see increasing competition from foreign financial institutions and frequent and large scale capital flows. Perhaps we can even some witness dramatic changes and intriguing events within China’s financial system shortly after December 2006 (the end of the five￾year transition period after joining the WTO). Finally, institutional investors began to emerge in the late 1990s although their scale and importance in the financial system was and still is limited. The first two mutual funds (Guo Tai and Nan Fang) were established in 1998. There are 46 fund