IMF chief Dominique Strauss-Kahn on Thursday said the currencies of China and other emerging economies should play a greater role in global finance, as part of a bid to promote monetary stability.
Strauss-Kahn, the managing director of the 187-nation IMF, backed the inclusion of the yuan in a basket of currencies that makes up the IMF’s Special Drawing Rights (SDR), a type of reserve currency.
Strauss-Kahn also advocated an expanded role for the SDR to help to bolster the monetary system in the face of damaging volatility.
Noting that the only way the world survived the 2008 financial crisis was through extraordinary -international policy cooperation, he said: “Global imbalances are back.”
If the problems were left unresolved, they “could even sow the seeds of the next crisis,” he said.
Such reform would help address the root of those global imbalances and bolster the system’s ability to prevent future crises.
“When we worry about the deficiencies of the international monetary system, we are mostly worrying about volatility: a sense that money sometimes flows around the globe in too volatile a fashion and that countries need a more stable, more predictable external environment in order to prosper,” Strauss-Kahn said.
He said the IMF has been -working to limit that volatility through several approaches: by strengthening coordination of economic and monetary policy, stepping up surveillance of capital flows and improving its financial safety net for member nations in need.
Under a mandate from the G20 developed and emerging economies, representing about 90 percent of global output, the IMF has launched a mutual assessment process that takes into account the global effect of country-level policies.
France, which holds the rotating G20 presidency this year, has put currency reform at the top of its agenda.
Strauss-Kahn’s remarks were his clearest yet showing an alignment with the remedies proposed by French President Nicolas Sarkozy.
As part of a reform toolkit, Strauss-Kahn suggested a central role for SDRs.
“Over time, there may also be a role for the SDR to contribute to a more stable international monetary system,” he said.
A key move would be expanding the SDR basket, which currently includes four major currencies: the US dollar, euro, yen and pound.
“Adding emerging market currencies — such as the renminbi [yuan] — could help the process of internationalization of these currencies, which would benefit the system as a whole,” he said.
The US cautiously welcomed the proposal, but a senior official said the yuan’s status would depend on whether Beijing allows the currency to trade freely.
“It is very important that the currencies in that basket be freely usable and be large in international transactions,” US Treasury Under Secretary Lael Brainard said.
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