France, US call for flexible exchange rates at G20

NANJING, China, March 31, 2011 (AFP) - French President Nicolas Sarkozy and US Treasury Secretary Timothy Geithner on Thursday called for more flexible exchange rate regimes as G20 nations met on global monetary reform in China.

The pair, speaking at the start of the talks in the eastern city of Nanjing, also urged a widening of the basket of currencies underlying the IMF's international reserve asset, while keeping the dollar and euro stable.

France's President Nicolas Sarkozy (C) and China's Vice Premier Wang Qishan (R) greet participants at the opening a one-day meeting of finance ministers and central bank chiefs from the G20 nations in Nanjing on March 31, 2010. AFP

The West wants to see the yuan become part of the International Monetary Fund's Special Drawing Rights (SDR) basket as part of its efforts to prod Beijing into opening up its tightly managed and controversial currency regime.

"It's clear we must move towards a more flexible exchange rate system that would allow the world to absorb shocks. But this system cannot evolve without rules, coordination and oversight, or instability will prevail," Sarkozy said.

Geithner echoed his comments, saying the gap between flexible and managed exchange rate policies -- and the problems such a divide creates -- was "the most important problem to solve in the international monetary system today".

"This asymmetry in exchange rate policies creates a lot of tension," Geithner said, noting that it "magnifies upward pressure" in emerging markets with flexible exchange rates and "intensifies inflation risk in those emerging economies with undervalued exchange rates" -- a clear reference to China.

The one-day seminar -- bringing together ministers and central bankers from the world's leading economies, as well as a select group of academics -- has been organised by France, which holds the Group of 20's rotating presidency.

The meeting, which comes as the global recovery faces major hurdles such as Japan's quake-tsunami disaster and the ongoing eurozone debt woes, aims to hone in on key ways to reform the monetary system.

China had ruled out any discussion of its tightly managed exchange rate regime despite ongoing criticism that the yuan is massively undervalued, giving its exporters an unfair trade advantage, but the issue nevertheless surfaced.

Chinese Vice Premier Wang Qishan vowed Beijing would "work with the rest of the international community" to ensure the "economic order will move towards a just and equitable and win-win direction".

Sarkozy called on the G20 to agree on a timetable for widening a basket of currencies determining the value of the SDR, which now only includes the dollar, euro, yen and pound.

"Isn't it time to agree on a calendar for the expansion of the SDR basket to new currencies from emerging nations such as the yuan?" Sarkozy said.

"We must support the inevitable internationalisation of the world's major currencies," he added.

"This of course does not mean calling into question the crucial roles of the dollar and euro, which must remain stable."

Geithner said the United States supports "reforms to change the composition of the SDR", adding that those countries whose currencies eventually become part of the SDR basket "should have flexible exchange rate systems".

Nobel prize-winning economist Robert Mundell agreed, telling reporters that an expansion would enable the IMF to "help Europe more and other countries that are in financial difficulties."

In a meeting between Sarkozy and Chinese President Hu Jintao on Wednesday in Beijing, Chinese authorities said they supported a "heightening of the internationalisation of the yuan," a French official said.

But the Chinese side also said there was "some way to go" before the yuan could be integrated into the SDR basket, according to the French source.

Including the yuan in the basket would "entail a hefty appreciation" of the unit and China is "unlikely to be able to stomach the necessary steps", Alistair Thornton, a Beijing-based analyst for IHS Global Insight, told AFP.

The conference was to feature closed-door group sessions on global capital flows -- which emerging economies including China say are fuelling inflation and driving up the value of their currencies -- and a speech from IMF chief Dominique Strauss-Kahn.

Aides close to Sarkozy have said that no concrete decisions are expected from the seminar.

At a meeting in Paris in February, the G20 agreed to a set of indicators to measure economic imbalances between surplus exporters such as China and nations with structural deficits such as the United States.

In Nanjing, though, such imbalances "will not be at the centre of discussions," one Western diplomat said earlier.

Other news