"China's economic stimulus has been financed by an explosion of bank credit. Worries in 2008 about a Chinese economic implosion following the collapse in Western demand for Chinese exports have been replaced by fears of Chinese asset price bubbles and overheating. While the gap between potential and actual Chinese economic output remains wide enough and the monetary control of the Chinese Government currently remains active enough to allay these fears, there still is an underlying problem here which arises from the lack of Chinese monetary controls. A government can choose to control either the level of its currency's exchange rate, or the level of domestic interest rates, but not both. By fixing the yuan against a basket of major currencies, of which the US dollar is the most important, China has yielded sovereignty over its domestic interest rate policy to the US Federal Reserve. China needs to regain control of its monetary policy, in order to increase the margin of safety around its economic management. This comprises a strong argument for an end to China's fix of the yuan against the currencies of its major importers in the US and Europe, particularly as US interest rates look likely to remain very low for a long time. A genuinely floating Chinese currency would allow the proactive use of Chinese domestic interest rates to ration credit and manage inflationary expectations. This would greatly reduce the likelihood of a Chinese asset price bubble resulting from continued economic stimulus."
(Giles Chance in 'China and the Credit Crisis,' p. 67 Wiley)