Exchange Rate Arrangements: The Flexible and Fixed Exchange rate debate revisited Gang yi China as an Optimal currency area China is a large country with tremendous differences across its land. The diversities between eastern and western regions, to some extent, exceed those of the euro zone. For instance, in the eastern part of China(such as the Pearl River Delta), the per capita income is about five times that of the western part(such as the Guizhou Province and Qinghai Province), whereas inside the euro zone, Germanys per capita income is only about 1. 5 times that of greece However even with these diversities china is still better positioned as an optimal currency area than the euro zone and can issue common currency, for China satisfies several key elements that are required by an optimal currency area The first one concerns fiscal setting. China, as a sovereign country possesses a centralized fiscal transfer payment system that enables the transfer of funds from the relatively rich regions in the coastal area to the poor regions in its less-developed middle and western regions every year Second, China also has a highly mobile labor market. Many people from the low-income regions seek better job opportunities in high-income regions consequently, at least 160 million rural workers are now working in Chinas cities. Third, China has a very unified domestic market sharing an integrated system of trading and transportation domestic markets such as the commodity market and the product market, are all homogeneous. Fourth1 Exchange Rate Arrangements: The Flexible and Fixed Exchange Rate Debate Revisited Gang Yi China as an Optimal Currency Area China is a large country with tremendous differences across its land. The diversities between eastern and western regions, to some extent, exceed those of the euro zone. For instance, in the eastern part of China (such as the Pearl River Delta), the per capita income is about five times that of the western part (such as the Guizhou Province and Qinghai Province), whereas inside the euro zone, Germany’s per capita income is only about 1.5 times that of Greece. However, even with these diversities, China is still better positioned as an optimal currency area than the euro zone and can issue a common currency, for China satisfies several key elements that are required by an optimal currency area. The first one concerns fiscal setting. China, as a sovereign country, possesses a centralized fiscal transfer payment system that enables the transfer of funds from the relatively rich regions in the coastal area to the poor regions in its less-developed middle and western regions every year. Second, China also has a highly mobile labor market. Many people from the low-income regions seek better job opportunities in high-income regions; consequently, at least 160 million rural workers are now working in China’s cities. Third, China has a very unified domestic market sharing an integrated system of trading and transportation. Domestic markets, such as the commodity market and the product market, are all homogeneous. Fourth