NANJING (MNI) – Representatives of the world’s major economies
gathered here Thursday for talks on reform of the global monetary system
which began with French President Nicolas Sarkozy noting that recent
currency movements have underlined the need for an immediate overhaul.

Sarkozy told delegates at the one day seminar that the
“unprecedented” strengthening of the yen earlier this month, and
euro-dollar moves in the past three months, demonstrated the world’s
choice between “every man for himself — with the attendant risk of
currency wars and crises — or cooperation and coordination.”

“The international monetary system must gradually evolve to reflect
the major trends in the world economy that we have observed,” he said,
predicting that the large emerging economies will account for half of
the world economy within 10 years, double their current quarter share.

But haggling over detail has so far undermined the broad agreement
for reform among the world’s largest economies, and it quickly asserted
itself here: the U.S. appeared to shoot down one of the French
president’s main proposals today, the moment he left the podium.

Signs of disagreement between France and the U.S. over the yuan’s
role are emblematic of the tangle of divisions within the G-20, which
often hinge on a “one size fits all” approach to policing the global
monetary system and mean any final settlement will be that much more
difficult to reach.

Sarkozy called directly on delegates to agree today on a timetable
for the expansion of the basket used to calculate the value of the IMF’s
Special Drawing Rights to include emerging market currencies, such as
the yuan, alongside the current dollar, euro, yen and sterling.

“This does not, of course, mean challenging the important role of
the dollar and the euro, which must be stable currencies,” he said.

“But the internationalisation of some other currencies is already a
reality.”

Wang Qishan, a Chinese vice premier and the country’s lead
representative at the talks, was more circumspect, telling delegates
earlier that “improving the international monetary system is a long and
complex process.”

“The reform should be pushed forward steadily,” he said.

Li Daokui, one of the advisers to the People’s Bank of China, who
was briefing reporters outside the main hall, cautioned that
overly-rapid reform of the monetary system could wind up hitting the
value of the dollar and U.S. Treasuries.

He, too, said the SDR basket should be expanded to include the yuan
to reflect China’s economic rise, arguing that the currency’s full
convertibility isn’t a prerequisite for inclusion.

But a statement by U.S. Treasury Secretary Timothy Geithner, which
was released the moment Sarkozy finished speaking, suggested the idea of
a greater role for the yuan is a non-starter for now.

Geithner outlined three criteria that instantly preclude the
Chinese currency’s participation in the basket. He expressed support for
expansion of the SDR basket, but only by those countries that have
“flexible exchange rate systems, independent central banks, and permit
the free movement of capital flows.”

In its five-yearly review of the SDR basket published last month,
the IMF said full convertibility is a criteria for inclusion, but also
that it is an “open question” if this should continue.

But the fund also noted the yuan’s link to the dollar and said its
inclusion in the basket would “de facto increase the weight of the U.S.
dollar in it, and allow the exchange rate policy of one country to
impact the value of the SDR in a discretionary way.”

Geithner said that the asymmetry between the flexible exchange
rates of the major currencies and tightly controlled emerging market
currencies is “the most important problem to solve in the international
monetary system today,” without mentioning China by name.

He argued that the solution is for the drawing up of international
rules through existing institutions.

Along with increased protectionism, this asymmetry “magnifies
upward pressure on those emerging market exchange rates that are allowed
to move and where capital accounts are much more open (and) intensifies
inflation risk in those emerging economies with undervalued exchange
rates,” he said.

Sarkozy also highlighted proposals including an expanded
surveillance role for the International Monetary Fund to include capital
account monitoring and the right for the fund to raise debt in the
markets to help with funding allocations during crisis periods.

He expressed hope that agreement on new rules to govern the global
monetary system can be reached by the time G-20 leaders meet in Cannes
in November this year for the final gathering under the French
presidency.

The French president’s call for beefing up the role of the yuan is
just one of proposals that has been put forward to build a more
resilient monetary system.

But it’s in the resistance that meets these smaller issues — which
also include Geithner’s fixed targets for current account balances —
that national interest is shown asserting itself, and that the broader
challenge of overhauling the global monetary system is highlighted.

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