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Since its economic reforms, China had followed a pegged exchange rate regime as an incentive to its exporters. However, in July 2005, China, under immense international pressure resorted to a policy of managed float. Since then its currency had appreciated by almost 16% against the US dollar. However some economists are of the opinion that the appreciation is marginal and it will only aggravate China's economic problems. China is already suffering from a weak financial system, expansionary credit policy and a rising inflation rate. A major appreciation in the Chinese exchange rate can only help China to come out of these problems. However, there is a separate school of thought saying that a major appreciation in Chinese currency can drag China to a liquidity trap situation, as was the case in Japan in the late 1980s and 1990s. The case discusses the various issues related to the managed float policy in China. It also discusses the economic effect of a sudden appreciation of the Chinese currency on China.