I have been having a similar discussion for about two years, although it is not about their refusal to float. Indeed, their currency sort of does float in that it is the trade weighted average of the currencies that are trading partners. On a long run basis that is no different that a floating currency, but it is a very very long run basis. It is no longer pegged to the dollar but rather the value of a basket of currencies.

Fixed versus floating currencies shouldn't be able to cause this problem. The problem, as I see it, is their sheer level of reserves. The Chinese central bank has been in the same position the US Federal Reserve was in during the 1920's and has acted the same way. To protect China's economy it locked up huge cash reserves, starving the rest of the world of cash. This was not apparent prior to the crisis and in fact liquidity was seen as being a "sea of liquidity" but that was due to China floating back it cash reserves for money market instruments. Money Zero Maturity skyrocketed prior to the crisis.

China has a problem and it isn't the flotation issue. If it released the money during the boom years it would trigger runaway inflation, but to hold 25 times the cash reserves as the entire American banking system and not to be able to use them is a big problem that is now coming home to them. Fortunately they have a simple solution, reduce reserves and let the system inside China start functioning. The two big problems is that they don't really have a banking system that is functional and that if the US currency goes into deflation then any Chinese citizen spending dollars would have to be nuts. We need to trigger inflation so the Chinese can start spending.