CATO JOURNAL retention system. Under the"dual" exchange rate regime, if a firm needed foreign exchange to import, it could obtain foreign exchange through three channels: (1)buy foreign exchange at the market rate, (2)buy a quota from the market and use the quota to purchase for- eign exchange at the official rate, and (3)apply for a quota from the State Administration of Foreign Exchange(SAFE)and use the quota to buy foreign exchange at the official rate. The price of a quota was roughly the difference between the official and the market rates. My estimation is that the weighted average of the rmb exchange rate depreciated by 4 percent vis-a-vis the dollar in 1993, compared with the 8.7 RMB per USD as the starting rate of the new regime at the beginning of 1994(Table 1). The trade surplus in 1994 was very nodest, only $5. 4 billion. And the trade surplus for 1995-2004 was fairly stable, indicating that the rmb/USd exchange rate was close to its equilibrium level. The appreciation pressure afterward was partly driven by the productivity gains and the institutional reasons explained in this article, and partly by the weakening of U.S. dollar, especially since 2002. Since 1994, China has been promoting market-oriented reform of the rmb exchange rate mechanism. Three stages can be delineated 1. 1994-96: a single and managed floating exchange rate regime based on market supply and demand. During this period, the nominal rmb/usd exchange rate rose by nearly 5 percent 2. 1997-2005 after the 1997-98 Asian financial crisis Chin maintained a stable exchange rate at 8.28 RMB per USD 3 July 2005-present: China reformed the RMB exchange rate regime by moving to a managed float based on market suppl and demand with reference to a basket of currencies. The new system features and expanded floating band, an improved spot rate formation mechanism the establishment of a forward mar- ket, reformed open market operations, and a more market-ori- ented foreign exchange management mechanism From July 21, 2005, to the end of November 2007, the RMB appreciated by a total of 12 percent against the USD. According to the Bank for International Settlements. the nominal effective exchange rate index for the RMB increased by 40.9 percent from January 1994 to February 2002, decreased by 13. 1 percent fron February 2002 to July 2005, and rose again by 2. 1 percent from July188 Cato Journal retention system. Under the “dual” exchange rate regime, if a firm needed foreign exchange to import, it could obtain foreign exchange through three channels: (1) buy foreign exchange at the market rate, (2) buy a quota from the market and use the quota to purchase for￾eign exchange at the official rate, and (3) apply for a quota from the State Administration of Foreign Exchange (SAFE) and use the quota to buy foreign exchange at the official rate. The price of a quota was roughly the difference between the official and the market rates. My estimation is that the weighted average of the RMB exchange rate depreciated by 4 percent vis-à-vis the dollar in 1993, compared with the 8.7 RMB per USD as the starting rate of the new regime at the beginning of 1994 (Table 1). The trade surplus in 1994 was very modest, only $5.4 billion. And the trade surplus for 1995–2004 was fairly stable, indicating that the RMB/USD exchange rate was close to its equilibrium level. The appreciation pressure afterward was partly driven by the productivity gains and the institutional reasons explained in this article, and partly by the weakening of U.S. dollar, especially since 2002. Since 1994, China has been promoting market-oriented reform of the RMB exchange rate mechanism. Three stages can be delineated: 1. 1994–96: a single and managed floating exchange rate regime based on market supply and demand. During this period, the nominal RMB/USD exchange rate rose by nearly 5 percent. 2. 1997–2005: after the 1997–98 Asian financial crisis China maintained a stable exchange rate at 8.28 RMB per USD. 3. July 2005–present: China reformed the RMB exchange rate regime by moving to a managed float based on market supply and demand with reference to a basket of currencies. The new system features and expanded floating band, an improved spot rate formation mechanism, the establishment of a forward mar￾ket, reformed open market operations, and a more market-ori￾ented foreign exchange management mechanism. From July 21, 2005, to the end of November 2007, the RMB appreciated by a total of 12 percent against the USD. According to the Bank for International Settlements, the nominal effective exchange rate index for the RMB increased by 40.9 percent from January 1994 to February 2002, decreased by 13.1 percent from February 2002 to July 2005, and rose again by 2.1 percent from July