Under what circumstances might adopting a free float destabilize the Chinese economy?

Answer 1

Under any set of economic circumstances. Fixing the exchange rate is the same thing as having a sticky set of prices. You get distortions. If you drop the distortion, the system will seek out a better equilibrium. This will of course destroy jobs, social networks, possibly banks and potentially capital. From a welfare perspective the economy would end up better off, but it could be unbelievably painful for the economy to reach that point. Look at Russia with its attempts at free markets. Stochastic paths do not have to be virtuous.