1997, the renminbi's nominal exchange rate against the USD appreciated by 4.8 per cent, up to 8.2. Taking into account the rapid increase in domestic prices in the period from 1994 to 1995, the real appreciation of the renminbi against the USD was 39 per cent. Meanwhile the renminbi's nominal and real effective exchange rates rose by 10.9 per cent and 30.2 per cent, respectively(IMF, IFS database 2004) The appreciation of the renminbi during the period from 1994 to 1997 once again led to the expectation of a devaluation. This expectation was further intensified by the Southeast Asia financial crisis of 1998, which incurred a wave of capital flight. To prevent the crisis from spread ing further, the PRc government made a commitment to not devalue the renminbi, keeping it at 8.28 yuan per USD and taking other measures to offset the external shocks to exports, including, for example, export tax refunds. This was recognized as a significant contribution by the prc to the economic and financial stability of Asia and the world Since the prc did not devalue the renminbi while most of the other currencies weakened against the USD from 1997 to 2001, the renminbi became one of a few strong currencies in emerging markets. Its nominal and real effective exchange rates rose by 10.9 per cent and 5.5 per cent, respectively It must be recognized, however, that the commitment to not devalue the renminbi was not without costs. In fact, one of the costs that the PRC had to bear was deflation. To get rid of the deflation, the PRC had to adopt a five-year proactive fiscal policy, which resulted in a considerable fiscal deficit. Of course, perhaps thanks to the deflation, which finally strengthened the competitive power of Chinese products, as well as to the proactive fiscal policy, which improved the social infrastructure and investment environment, the PrC economy enjoyed economic prosperity in recent years deflationary Press hary achievements were made under the nation's efforts to tackle Shortly aft sures came the external shocks from the terrorist attacks of 11 September 2001 and the outbreak of the SArs(severe acute respiratory syndrome)epidemic in the PRC and other Asian countries, and the world economy slowed down. The PRC maintained consistency in its exchange rate policy and continued to keep the renminbi exchange rate within a relatively narrow range(Guo Shuqing, 2004) Since it was still pegged to USD after 2002, the renminbi exchange rate weakened along with the USD. by the end of 2003, the exchange rate of the euro had risen by 36 per cent and the Canadian dollar, British Pound, Japanese yen and Korean won by 19 per cent, 17 per cent, 14 per cent and 11 per cent respectively, while the Mexican peso fell by 14 per cent and the brazilian real by 17 per cent( David Wessel 2003). Accordingly, nominal and real effective exchange rates of the renminbi vis-a-vis other foreign currencies fell by 9. 3 per cent and 11.0 per cent, respectively. Taking account of the real appreciation of the renminbi between 1998 and 2001. this means the effective exchange rates both in nominal and real terms remain approximately at the level of 1998 In summary, the renminbi's nominal exchange rate was basically in a downward trend before 1994. when the exchange rate integration was achieved. but afterwards. it became1997, the renminbi’s nominal exchange rate against the USD appreciated by 4.8 per cent, up to 8.2. Taking into account the rapid increase in domestic prices in the period from 1994 to 1995, the real appreciation of the renminbi against the USD was 39 per cent. Meanwhile, the renminbi’s nominal and real effective exchange rates rose by 10.9 per cent and 30.2 per cent, respectively (IMF, IFS database 2004). The appreciation of the renminbi during the period from 1994 to 1997 once again led to the expectation of a devaluation. This expectation was further intensified by the Southeast Asia financial crisis of 1998, which incurred a wave of capital flight. To prevent the crisis from spreading further, the PRC government made a commitment to not devalue the renminbi, keeping it at 8.28 yuan per USD and taking other measures to offset the external shocks to exports, including, for example, export tax refunds. This was recognized as a significant contribution by the PRC to the economic and financial stability of Asia and the world. Since the PRC did not devalue the renminbi while most of the other currencies weakened against the USD from 1997 to 2001, the renminbi became one of a few strong currencies in emerging markets. Its nominal and real effective exchange rates rose by 10.9 per cent and 5.5 per cent, respectively. It must be recognized, however, that the commitment to not devalue the renminbi was not without costs. In fact, one of the costs that the PRC had to bear was deflation. To get rid of the deflation, the PRC had to adopt a five-year proactive fiscal policy, which resulted in a considerable fiscal deficit. Of course, perhaps thanks to the deflation, which finally strengthened the competitive power of Chinese products, as well as to the proactive fiscal policy, which improved the social infrastructure and investment environment, the PRC economy enjoyed economic prosperity in recent years. Shortly after primary achievements were made under the nation’s efforts to tackle deflationary pressures came the external shocks from the terrorist attacks of 11 September 2001 and the outbreak of the SARS (severe acute respiratory syndrome) epidemic in the PRC and other Asian countries, and the world economy slowed down. The PRC maintained consistency in its exchange rate policy and continued to keep the renminbi exchange rate within a relatively narrow range (Guo Shuqing, 2004). Since it was still pegged to USD after 2002, the renminbi exchange rate weakened along with the USD. By the end of 2003, the exchange rate of the euro had risen by 36 per cent, and the Canadian dollar, British Pound, Japanese yen and Korean won by 19 per cent, 17 per cent, 14 per cent and 11 per cent respectively, while the Mexican peso fell by 14 per cent and the Brazilian real by 17 per cent (David Wessel 2003). Accordingly, nominal and real effective exchange rates of the renminbi vis-a-vis other foreign currencies fell by 9.3 per cent and 11.0 per cent, respectively. Taking account of the real appreciation of the renminbi between 1998 and 2001, this means the effective exchange rates both in nominal and real terms remain approximately at the level of 1998. In summary, the renminbi’s nominal exchange rate was basically in a downward trend before 1994, when the exchange rate integration was achieved, but afterwards, it became