A fixed currency policy is where a government arbitrarily dictates the rate of exchange between it's currency and those of other nations, ignoring the current-accounts balance (trade deficit or surplus). A floating currency policy is where the exchange rate is set by the supply /demand dynamics of the currency (the market).
In China's case, even though it has an excess of dollars ($1 trillion, by some estimates) and that surplus should devalue the dollar in relation to the yuan, the Chinese government sets a fixed exchange rate of 8.066 yuans to the dollar. This makes yuans cheap in comparison to the dollar, and gives China an unfair trade advantage with the U.S. The effect is to make Chinese imports less expensive than domestic products, so Americans buy the imports instead of American products. It grossly inflates the trade surplus China has with the U.S. (and other foreign currencies, as well), and basically causes us to finance growth of the Chinese economy (9%, last year), and costs our economy jobs. That trade surplus greatly contributes to the modernization of China's infrastructure (everything from airports to ports to telecommunications, etc.) and that, in turn, means that the west is basically underwriting the relative military capability of China.
A floating currency policy would revalue the yuan in relation to it's current-accounts balance with the dollar (and also other foreign currencies). It would reduce Chinese exports, thereby reducing the trade surplus (and possibly even eliminating it); less foreign income would flow into China, meaning they would have less money to plow into modernizing their economy (and slowing down the military buildup). It would also mean that fewer American jobs would disappear to Chinese competition.
In a nutshell, it means that China has been "cheating" in it's trade relationship with the United States (and other nations, as well). Rightly so, Congress and the markets have been greatly concerned about this artifical imbalance, and grilled Fed. Chairman Bernanke both on the effect this cheating has on our economy, and how to force China to comply with international currency standards. Here is a short article from MarketWatch which details legislation introduced to strip China of normal trade status (which confers certain trading privileges to China):
U.S. Senators seek to end China's normal trade status
By John Godfrey
Of DOW JONES NEWSWIRES
"WASHINGTON (MarketWatch) -- U.S. Sens. Lindsey Graham, R-S.C., and Byron Dorgan, D-N.D., announced legislation Thursday that would revoke normal trade relations with China.
Under the legislation, Congress would have to vote annually to grant China normal trade relations with the U.S.
Dorgan and Graham said China has "cheated" consistently since the U.S. granted it permanent normal trade relation status in 2000. "
FTR, there is a great disparity of opinion on how to force China to float it's currency, and even Bernanke did not offer any real solutions; he merely advised that it should occur. There are legislative measures that our Congress can enact to "encourage" the Chinese to quit cheating, and there are also World Trade Organization (WTO) channels through which we can seek compliance (but the WTO is notoriously slow in resolving trade complaints). The issue is complicated by the possibility of Chinese retaliation (such as imposing general or specific tariffs on our imports into China, and also erecting regulatory barriers to our ability to penetrate the Chinese market with goods and services.)
Our trade deficit with China is not only the result of this currency cheating, but it indirectly weakens our national security in relation to a possible military confrontation over Taiwan (or other future theatres of conflict). It has to end, somehow. That's the conundrum. Sorry to be so long-winded, but it is a complicated, vital issue of economic and national security.