Financial leaders of the Group of 20 top economies appeared to reach informal agreement Thursday on the need for China's currency to have a wider role in global finance, but not as a substitute for the U.S. dollar.
French Finance Minister Christine Lagarde said the daylong meeting agreed the G-20 should study including China's yuan in the basket of currencies that sets the value of the International Monetary Fund's SDRs, or Special Drawing Rights _ a quasi currency created by the IMF that is used in dealings with and between member governments.
"We raised with our Chinese friends the idea of including the yuan, under conditions and a time frame to be agreed upon," Lagarde said. "From right now we will start work on broadening the basket of currencies." The basket now includes the dollar, Japanese yen, euro and British pound.
Including the yuan would underline China's increased clout in the global economy and finance after it last year overtook Japan to become the second-biggest economy. It might also serve as a carrot that other G-20 members hope will encourage Beijing to relax controls that limit the Chinese currency's appreciation.
Since the gathering in the eastern Chinese city of Nanjing was not an official G-20 meeting, there was no formal agreement, Lagarde said. She also clarified there was "no suggestion whatsoever that the dollar be replaced by SDRs," an option that has been raised by China as a way of reducing global reliance on the dollar for trade and as a reserve currency.
"There is recognition that the dollar plays a critical role and will continue to do so," Lagarde said.
SDRs are allocated by the IMF based on each country's voting rights in the organization and the fund acts as a middleman between countries that want to exchange them for freely traded currencies. The IMF can require countries with ample currency reserves to buy SDRs from weaker nations in exchange for real currency.
The G-20 financial mandarins also agreed on the need for reforming the IMF to make it more diverse and representative _ a long-standing demand from Beijing and other developing nations _ and to make it more capable of monitoring trends and helping stave off financial crises.
Closer coordination and "common rules of the game" are needed to prevent currency wars, Lagarde said.
Despite the show of consensus, discord over the issue of China's exchange rate policies was evident, with French President Nicolas Sarkozy kicking off the talks by urging Beijing to move ahead further with internationalizing the tightly-controlled yuan.
Beijing has restrained the yuan's rise since the 2008 global crisis to help exporters that employ millions of workers compete abroad, though it has been easing those controls in recent months.
U.S. Treasury Secretary Timothy Geithner, without directly mentioning China, told a closed-door panel that such controls add to financial strains. Washington has long complained that Beijing keeps the yuan artificially cheap, giving Chinese exporters an unfair advantage in international markets.
"This asymmetry in exchange rate policies creates a lot of tension," he said, according to a text of the remarks provided to journalists. "It intensifies inflation risk in those emerging economies with undervalued exchange rates. And, finally, it generates protectionist pressures."
The talks ended without any public statement by the Chinese officials attending. They had insisted that China's currency policy was not on the agenda before the talks began. In his opening remarks Vice Premier Wang Qishan cited the need for only gradual change.
Sarkozy made an urgent appeal for continued progress on reforming the international monetary system to enhance its stability.
"It is clear that we must evolve toward a more flexible exchange rate system that will allow us to withstand shocks," Sarkozy said. There is also a need, he said, for rules and supervision to ensure countries are protected from the excess volatility that can come with liberalized currency trading.
"Now that the crisis is past, the temptation to not act is very strong. If we lose the impetus that we achieved during the crisis then the world will slide inexorably back into instability and crisis," he said before leaving for Tokyo.
His visit to Japan is intended to express the G-20's support for the country as it struggles to cope with the aftermath of the calamitous March 11 earthquake and tsunami, and the ensuring nuclear power plant crisis.
Geithner told a panel at the G-20 meeting that easing controls on exchange rates and shifting to more market oriented policies are key steps toward managing inflation _ a problem that China is currently struggling with.
Signaling Beijing's frustrations with the dominant role of the dollar in world finance, and the volatility of its own huge holdings of U.S. Treasuries, a prominent Chinese economist published a commentary, just before the talks, accusing the U.S. Federal Reserve of acting irresponsibly and unfairly.
"Only the United States can have an independent monetary policy and other countries must follow," wrote Xu Hongcai, of the government-affiliated China Center for International Economic Exchanges.
Beijing has invested more than $800 billion of its $2 trillion in foreign reserves in U.S. Treasuries but is uneasy about the dollar's stability. It accused the Fed of trying to devalue the dollar when it decided last November to buy $600 billion in U.S. government debt in an effort to revive the economy through a policy known as quantitative easing.
Geithner agreed with Sarkozy's call for the yuan to be included in the basket of currencies used for SDRs but with a caveat.
"Over time, we believe that currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket," he said. "To achieve this objective, the concerned countries should have flexible exchange rate systems, independent central banks, and permit the free movement of capital flows."