Until the global financial crisis hit, China had achieved export-led high economic growth by keeping its currency at an undervalued level. It is now abundantly clear that the growth model is not sustainable. The People's Bank of China reinstated the "managed floating exchange rate regime with reference to a basket of currencies" that it had started in 2005 and suspended in 2008, explaining that "a floating exchange rate draws economic resources to sectors driven by domestic demand." China needs to move to a growth model in which external and domestic demands will be better balanced. The basket of currencies is a device to let the yuan move with the currencies of China's major trading partners, not with the dollar.
Can China achieve more balanced economic growth? Let us have a look at Japanese experiences to see the perils China may face.
Japan achieved an export-led high economic growth by keeping the yen at an undervalued level, which resulted in an economic structure of excessive production capacity and insufficient domestic demand. Its trade surplus exceeded a level the international community would tolerate. The yen then excessively appreciated, which drove Japan into an unintended restructuring with two major consequences.