International Monetary Fund chief Dominique Strauss-Kahn Thursday called for a greater role for China's yuan currency as part of a broad-based overhaul of the international monetary system.
In a speech at the IMF Mr. Strauss-Kahn said adding emerging market countries' currencies, such as the yuan, to a basket of currencies that the IMF administers could add stability to the global system.
He saw a greater role for the IMF's Special Drawing Rights, which is currently composed of the dollar, sterling, euro and yen, over time but said it will take a great deal of international co-operation to make that work.
"Increasing the role of the SDR would clearly require a major leap in international policy co-ordination," Mr. Strauss-Kahn said, according to a prepared text of the speech. "For this reason, I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy."
The IMF chief said without changes to the global system the world could be sowing the seeds of the next economic crisis.
He said global economic imbalances were back and issues such as large and volatile capital flows, exchange rate pressures and rapidly growing excess reserves were threatening economic stability.
"In my opinion, reforms to the international monetary system that help us get to the root of these imbalances could both bolster the recovery and strengthen the system's ability to prevent future crises," Mr. Strauss-Kahn said in prepared text of a speech.
He said overhauling the international monetary system could bolster the still fragile global economic recovery and help to prevent future crises.
Mr. Strauss-Kahn's speech comes a week before finance ministers from the Group of 20 developed and developing nations meet in Paris to discuss proposals by French President Nicolas Sarkozy for changes to global economic governance.
Debate has increased about the U.S. dollar's status as the main global reserve currency, especially with emerging market economies providing most global growth and their increased importance in global financial institutions.
The SDR is seen by some as a compromise currency, one that recognizes both the importance of the major developed economies but also allows for greater representation for emerging economies in its composition.
Among the yuan's drawbacks is that it is not freely traded and China's capital markets are largely closed.
But Beijing has been expanding a pilot program to encourage the use of the yuan in cross-border trade in what economists say is part of a strategy to raise the currency's profile.
The SDR is not a currency. It is an IMF accounting unit, and is only used as a reserve asset by central banks and is not available to the private sector.
An IMF paper released alongside Mr. Strauss-Kahn's speech on an enhanced role for the SDR said the U.S. dollar's safe-haven role had been confirmed during the recent financial crisis and would remain the most important global reserve currency "for the foreseeable future."
But the paper noted a greater role of the SDR would reduce currency volatility and would ensure that countries have easier access to foreign exchange funding during a crisis.
The paper also said the using the SDR to price global trade would provide a buffer from exchange rate volatility, while the issuance of SDR-denominated bonds could create a potentially new class of reserve assets.
Follow us on Twitter: