There has been a lot of comment on this subject of late, so just a brief thought post a visit to mainland.
Seems to me that the best policy for the Chinese authorities to adopt would be to let the Renminbi freely float. At a stroke all criticism of the regime is done away with, and it is unlikely there would be a major cost in terms of Renminbi appreciation. There is a lot of speculative money sitting in Renminbi seeing it as a one way bet with small positive carry against USD and HKD. Make it free floating and suddenly you have downside as well as upside from holding Renminbi and a lot of people would respond by moving out.
The domestic Chinese would also be likely to sell Renminbi under a freer regime. The negatives of the Chinese economy are much clearer when you live there and many Chinese have little faith in the currency. Big investors in China see opportunities to buy assets cheaply in the US particularly. When in China, you often find the dollar is very popular for purchases, again suggesting that the right exchange rate may be a lower Renminbi rather than a higher one.
It would be a major gamble for the Chinese authorities. Not only have they not shown any inclination to take this kind of gamble, but in the current climate they would be seen as caving in to pressure. So it is not a high probability event. But maybe Wen Jiabao's insistence this week that the Renminbi is not undervalued shows that they are thinking about it.
Disclosure: Long CNY