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The Chinese exchange rate has been the focus of discussion for many months, with both internal and external considerations seemingly pointing to the desirability of a currency revaluation. This paper draws from the lessons of international experience with exchangerate regimes in the period since Worm War Two. It lays out the conditions necessary to validate a fixed exchange rate and some intermediate regimes that might work when a fixed rate is inappropriate. It then discusses what the analysis implies for contemporary China.

The Chinese authorities have often emphasized the importance of maintaining the renminbi＇s stable exchange rate without stating explicitly how this stability should be measured. This paper argues that the relevant concept for this stability should be in terms of the rnminbi＇s effective exchange rate, rather than its rate against any particular currency, such as the U. S. dollar. Under the current circumstances where key currencies＇ exchange rates fluctuate freely, if the authorities wish to maintain the stability of the renmnibi＇s effective exchange rate, they would want to let the renminbi＇s exchange rate fluctuate much more against the U. S. dollar than in the past because such fluctuations would greatly reduce the magnitude of the renminbi＇s fluctuations against other key currencies and thus its effective exchange rate. This point has been demonstrated by illustrative figures and by comparing the renminbi＇s hypothetical, greater exchange rate fluctuations with its actual fluctuations.

China’s foreign trade experienced three consecutive years of super-speed growth in 2002-2004, even though the country was stricken by the SARS epidemic in 2003 and power shortages in 2004. What has gone beyond expectations is that the exports trade still grew with momentum after the central government lowered the export rebate rates by an average of 3 percentage points, starting from January 2004. Such growth momentum is apparently associated with external demand and the performance of the domestic macroeconomy, and even more associated with a series of support policies. This paper tries to raise issues issues associated with these policies on the basis of an analysis of foreign trade performance in 2002-2004, in order to enhance understanding of the advantages and disadvantages of these policies, and to recommend a new line of thought for improving policy arrangements for the growth of import and export trade and for the harmonious development of the macroeconomy.

China＇s recent declaration of principles on its exchange rate mechanism has made it very clear that any move should be on China＇s own initiative; such a move should be sustainable and under control. China has adopted gradualism in the exchange rate reform process. On July 21st, 2005, China changed Renminbi （RMB） pariy （appreciation） by 2 percent, signaling the exchange market reform process. This paper is to study the past history of the crawling-peg of RMB on the US dollar with a view of its future reform. The flexibility provided by the crawling-peg still fits well with China＇s status quo. However, the flexible mechanism should follow the trend of China＇s economic development with well-timed parity changes. The extent of the fluctuation band rests upon China＇s ability to maintain its currency stability to counter future speculation and shocks. Only when the market mechanism is restored in China can an equilibrium RMB exchange rate be reached.

CHINA＇S trade surplus is heading for an all-time high in 2005, for the 11th year running. A recent report issued by the State Information Center＇s Macro-economy Monitoring and Pre-warning Research Group says that China＇s imports and exports will see respective growths of 18 and 22 percent in the second half of this year, creating a trade surplus of more than US $30 billion. That, combined with the US $39.6 billion in the first half of the year, will bring the year＇s trade surplus to US $70 billion.