Depends on what you mean by "working"...

Here's a post by Brad Setser explaining why China's fixed exchange rate policy "isn't working" - as in, the peg isn't helping China. The idea is that the peg in and of itself isn't that bad for China, but the other policies necessary to sustain it are. I won't go into the details, but basically the idea is that keeping the peg requires China's government to A) keep employment lower than it could be, and B) keep interest rates lower than they could be.

Good analysis, but suspect conclusion. If the goal of China's government is to maximize the welfare of the Chinese people, then Setser is right - China could be doing a lot better by its huddled masses. But if the goal is keeping the Communist Party in power, then I'd have to say the peg has been a runaway success.

If you believe in "prospect theory", you believe that people compare what they have to some frame of reference, like what they had yesterday, instead of to what they could possibly have. So China's people may not be getting good returns on their savings, but it sure beats keeping jewelry under a mattress. They may not be getting as many jobs as they could, but they've got a lot more than in Mao's day. They may not be reaping their fair share of China's growth, but they're worlds better off than if the growth weren't happening. A world where Chinese people get $8000 a year and 2% interest on their savings accounts might be possible, but as of now it's just a fantasy. As long as the CCP keeps them better off than they were yesterday, they're not ging to rock the boat.

And a non-rocking boat is exactly what the CCP wants, because it means they get to stay in power, with all the prestige and money and hookers that entails. China's elites are happy because they're running away with all the cash, and China's masses are happy because they get two square meals a day and there's no one coming around to slice their thumbs off (usually).

I'd say this system sounds like it's working just fine...


(well, except maybe for the floods and droughts caused partly by China's greenhouse emissions, cancer villages caused by pollution, "bachelor villages" of malcontent men who can't find wives because of China's gender disparity, etc...but those are stories for another day...)