In 1994 China effected the reform of foreign exchange system as meaningful as a milestone, instituting a controlled floating system, and setting the target for the realization of convertibility of RMB in capital account. Before the Asia Financial Crisis happened, China’s foreign exchange policy had been real-targets-approach-oriented, with promotion of export and earning foreign exchange as its objective, and under a system of floating foreign exchange rate. But during and after the Asia Financial Crisis, in the opinion of academic circles, the system of foreign exchange rate of RMB was one with a nominal anchor approach (instead of real targets approach)-a de facto single US dollar peg, which is substantial transformation in our foreign exchange rate system. But should China, after the recovery of Asia economy,continue to keep the dollar peg,or return to the controlled floating system? The Japanese yen was greatly depreciated against the US dollar at the end of 2001, when many economists suggested an increase in the flexibility of exchange rate of RMB. The orientation of exchange rate of RMB is determined by the comparative cost/ return analysis of the two exchange systems. In recent years, the exchange rate of RMB has been unusually stable. In this article I attempt to analyze the cost and benefit resulted from the present selection of the exchange rate system of RMB.
