G20 leaders have moved towards agreeing that China's currency should have a wider role in global finance. The G20 is to study whether to include the Chinese Yuan within the basket of currencies that make up the IMF Special Drawing Right.
The Special Drawing Right, or SDR, is a quasi currency used within the IMF by its member countries. Some economists believe the SDR could one day become a global reserve currency alongside the US dollar.
Speaking on Thursday at the G20 summit in Nanjing, French President Nicolas Sarkozy suggested that given the importance of emerging economies such as China to global growth, their currencies should be added to the SDR basket.
Without rules and supervision, the world runs the risk of being condemned to increasingly serious and severe crises, said President Sarkozy. It is clear that we must evolve toward a more flexible exchange rate system that will allow us to withstand shocks, he added.
His comments were backed by US Treasury Secretary Timothy Geithner who said he supported a change to SDR composition.
Over time, we believe that currencies of large economies heavily used in international trade and financial transactions should become a part of the SDR basket, he said.
However, Mr Geithner said that for this to happen, governments would have to loosen their control of currencies.
To achieve this objective, the concerned countries should have flexible exchange rate systems, independent central banks and permit the free movement of capital flows, he said. Mr Geithner said tight control of currency pricing by some countries was hurting the global economy.
French finance minister Christine Lagarde also suggested that any move to include the Yuan within the SDR basket would involve conditions being placed upon the Chinese authorities.
We discussed the conditions that apply to belonging to the SDR basket and in particular we focused on the convertibility and flexibility of the currency and the relative independence of the central bank, she said.
The US and other developed nations have been critical of China's exchange rate policy.
There have been repeated calls for China to let the value of the Yuan appreciate against the US dollar. It has been accused of keeping the value of the yuan artificially low in order to help its exporters. Beijing has maintained that a sudden appreciation of its currency will be detrimental not only for its export sector but for its overall economy.