After more than twenty years of rapid development of China's economy and foreign trade sector, both China itself and the rest of the world are for the first time coming to grips with the reality that China's economic policy choices now have global repercussions. As the international consciousness of China's influence grows, China's economic policies have naturally come under increasing criticism from countries that feel they are being affected negatively by those policies. This phenomenon can be seen in the recent controversy surrounding China's foreign exchange regime and pegged exchange rate system.

Calls on China to revalue or float its currency - coming primarily from Japan and the United States - have been intensifying since late 2002. The accumulating international political pressure for China to adjust its exchange rate policy has sparked intense debate among economic and political analysts concerning the appropriate foreign exchange and exchange rate system for China. While this debate has focused principally on China's choice of exchange rate mechanism, i.e. the pros and cons of letting the RMB float according to market demand and supply versus pegging the currency to one degree or another, the debate has also encompassed China's overall policy of maintaining restrictions on the free flow of foreign currency and the convertibility of the RMB.

This paper is intended to contribute to the current debate on China's foreign exchange regime by providing a systematic analysis of China's current regulatory and administrative regime governing foreign exchange transactions and the RMB exchange rate. Because the public debate on China's foreign exchange policies has been waged primarily by economists and politicians, it is not surprising that relatively little attention has been paid to the underlying regulatory regime and how it serves to promote the overall policy choices adopted by the Chinese leadership. By providing a comprehensive overview of China's foreign exchange regime, it is hoped that this paper will aid in better understanding and analyzing China's foreign exchange system and exchange rate mechanism.

In addition, by analyzing the historical development as well as current manifestation of China's forex regime, this paper aspires to contribute to the substantial existing literature on China's economic and legal reform and development. The ongoing reform of China's foreign exchange regime should provide an illuminating example of China's characteristic development path. Moreover, the relative success of China's gradualist approach to foreign exchange and exchange rate liberalization allows it to serve as a model for other transitional or developing economies.

In addition, it is hoped that an analysis of China's current foreign exchange regime will promote a more thorough understanding of the overall state of China's regulatory mechanisms today. As a critical part of China's economic policy and law, comprehensive knowledge of China's forex regime should be useful to lawyers, academics, and all those interested in China's legal system and economic policy choices.

The body of this paper is divided into five sections. Section II covers the historical development of China's foreign exchange policy and law since the Nationalist era. Section III provides an analysis of the institutional and legal framework underlying China's current foreign exchange regime. Section IV deals with the regulation of supply and demand of foreign currency through regulation of current account and capital account transactions. Section V describes China's current exchange rate policy and its relationship to regulatory controls on capital movements and forex trading. The final section will examine the likely path of further reform of China's forex regime in the years ahead.