RENMINBI EXCHANGE RATES AND RELEVANT INSTITUTIONAL FACTORS Yi gang In recent years, China has experienced rapid social and economic development. Against this backdrop, growing pressure for renminbi appreciation emerged and Chinas trade surplus and foreign reserves increased rapidly. This article explains the development of the RMB exchange rate by examining productivity growth and institutional fac tors, such as the transformation of the foreign exchange rate system and legal reforms to strengthen the rule of law Development of the Renminbi Exchange Rate On January 1, 1994, China unified the"dual" exchange rate s gime into a single one. The official rate before January 1, 1994 was RMB per USD and 8.7 RMB per USD after exchange rate uni- fication. Some observers argued that China depreciated the RMB by 40 percent in 1994. However, that argument is a misconception Before 1994, China was still under the"dual"exchange rate egime, under which 80 percent of the foreign exchange trading vol- ume was at the market rate, and only 20 percent at the official rate The 8.7 RMB per USD rate was basically the market rate at the end of 1993. During 1993, the supply of foreign exchange mainly consis ed of two sources: (1) joint-venture firms that were allowed to retain their foreign exchange, and (2) domestic export companies that had excess foreign exchange retained under the foreign exchange Cato Joumal, VoL 2S, No. 2(Spring/Summer 200S). Copyright Cato Institute. All rights reserved. Yi Gang is Assistant Governor of the People's Bank of China.Renminbi Exchange Rates and Relevant Institutional Factors Yi Gang In recent years, China has experienced rapid social and economic development. Against this backdrop, growing pressure for renminbi appreciation emerged and China’s trade surplus and foreign reserves increased rapidly. This article explains the development of the RMB exchange rate by examining productivity growth and institutional fac￾tors, such as the transformation of the foreign exchange rate system and legal reforms to strengthen the rule of law. Development of the Renminbi Exchange Rate On January 1, 1994, China unified the “dual” exchange rate regime into a single one. The official rate before January 1, 1994 was 5.8 RMB per USD and 8.7 RMB per USD after exchange rate uni￾fication. Some observers argued that China depreciated the RMB by 40 percent in 1994. However, that argument is a misconception. Before 1994, China was still under the “dual” exchange rate regime, under which 80 percent of the foreign exchange trading vol￾ume was at the market rate, and only 20 percent at the official rate. The 8.7 RMB per USD rate was basically the market rate at the end of 1993. During 1993, the supply of foreign exchange mainly consist￾ed of two sources: (1) joint-venture firms that were allowed to retain their foreign exchange, and (2) domestic export companies that had excess foreign exchange retained under the foreign exchange Cato Journal, Vol. 28, No. 2 (Spring/Summer 2008). Copyright © Cato Institute. All rights reserved. Yi Gang is Assistant Governor of the People’s Bank of China. 187