French President Nicolas Sarkozy and US Treasury Secretary Timothy Geithner yesterday 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 Nanjing, also urged a widening of the basket of currencies underlying the IMF’s international reserve asset, while keeping the dollar and euro stable.
The West wants to see the yuan become part of the IMF’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, adding 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 organized by France, which holds the G20’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 (王岐山) 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 US 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 asked.
“We must support the inevitable internationalization of the world’s major currencies,” he said.
“This of course does not mean calling into question the crucial roles of the dollar and euro, which must remain stable,” he added.
Geithner said the US 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 (胡錦濤) on Wednesday in Beijing, Chinese authorities said they supported a “heightening of the internationalization of the yuan,” a French official said.