We build a monetary model to show how expected appreciation lead to revaluation pressure on a pegged exchange rate regime. This is one of the major challenges currently facing to ＜?xml:namespace prefix = st1 /＞China after accession to the WTO. This model assumes current account convertibility and some degree of capital control, and fundamentally sound domestic policies and economy, as is the case in China. The model demonstrates that market-oriented interest rates can act as an automatic stabilizer to ease appreciation pressures, but cannot resolve them completely because the nominal interest rate has a zero nominal bound. Therefore, the official parity will eventually collapse and the appreciation expectations can be self-fulfilling, in the absence of external intervention. The results of Granger causality tests are consistent with the findings of our theoretical model. There are a number of alternative policy intervention measures that can extend the life of pegged exchange rate regime.

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