Marks 15

Read the following excerpt from a news article dated June 1, 2015 in The Hindu - Business Line:

"China is currently up against the classic trilemma involving the impossible trio.

The country wants to keep the Yuan stable because it aspires to make it an international reserve currency akin to the US dollar. So the currency is allowed to fluctuate only 2 per cent on either side of a peg determined by the Chinese central bank. China is also trying to accelerate the move towards making the Yuan freely convertible as that is one of the prerequisites for an international currency.

But as we all know the Chinese economy is in need of a stimulus. If the Chinese central bank attempts to cut rates or injects liquidity, the currency will depreciate. Attempting to sustain the current rate of exchange will lead to depletion of forex reserves

This is impeding China from following the independent monetary policy needed to kick-start growth."

Using your understanding of the Mundell-Fleming model, Critically evaluate China's policy of attempting to achieve the "impossible". Is it sustainable?