China's Defense of the Peg Perpetuates Central Planning

China has maintained a nearly fixed exchange rate of 8.26 renminbi (RMB) to the U.S. dollar since 1994, in spite of the near total collapse of practically every other fixed exchange rate regime over the last decade. Hong Kong, a special administrative region of China, happens to have the world’s other so-far durable fixed exchange rate regime. That is a coincidence, geographically speaking. In Hong Kong’s case the stability of its exchange rate derives from the currency board appa-ratus that was installed before the 1997 reversion to China. The Hong Kong currency board model may be appropriate for smaller developing economies. Large economies are better candidates for floating exchange rates. If China is going to fulfill the objective of competing on the level of Japan, Europe, or the United States, it would make sense to move to an RMB floating regime (see, e.g., Dorn 2003). This advice coin-cides with recent pronouncements from the International Monetary Fund, encouraging China to drop or modify the peg. How did China’s fixed exchange rate survive when over the last 15 years fixed exchange rate regimes have self-destructed in such far-