REFILE-WRAPUP 3-G20 sets conditions for yuan to join SDR

(Refiles to fix typo in headline)

* Debate over adding yuan to SDR gains momentum

* China told it must free up yuan to join SDR basket

* Sarkozy warns of new crises without global money reform

(Recasts after close of meeting)

By Daniel Flynn and Annika Breidthardt

NANJING, China, March 31 (Reuters) – Finance ministers made
modest progress on Thursday towards reform of a global monetary
system that French President Nicolas Sarkozy said is so
unstable that it could tip the world economy back into crisis.

Ministers and central bankers from the Group of 20 leading
economies edged towards a consensus on the need to include
China’s yuan in the basket of currencies that makes up the
Special Drawing Right, the International Monetary Fund’s
in-house money.

Adding China’s currency to the SDR would be a recognition
of China’s ever-growing economic clout and would be a concrete
step toward making the global monetary order more
representative and, ministers hope, more solid.

“Without rules, the international monetary and financial
system is incapable of forestalling crises, financial bubbles
and the widening of imbalances,” Sarkozy said in opening a
day-long G20 seminar in this eastern Chinese city.

“Without rules and supervision, the world runs the risk of
being condemned to increasingly serious and severe crises,” he
told an audience that included IMF head Dominique Strauss-Kahn,
who is widely expected to run for president against Sarkozy
next year.

France is the chairman this year of the G20, which brings
together developed and emerging economies accounting for some
85 percent of global output.

Beijing, despite being asked to host the forum, has not
shown great enthusiasm for Sarkozy’s initiative.

“The reform process will be long-term and complex,” Chinese
Vice-Premier Wang Qishan said in his opening remarks.
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LET’S GET STUDYING

China suspects that the West is looking for new levers to
force Beijing to let the yuan, now tightly managed by the
central bank, trade more freely and to dismantle its capital
controls more quickly than it wants to.

These conflicting interests crystallised in Nanjing over
the conditions for including the yuan, also known as the
renminbi (RMB), in the SDR.

The SDR, now comprised of the dollar, euro, yen and
sterling, is a synthetic quasi-currency that is mainly used as
an accounting tool for the IMF’s internal operations.

Its reach is otherwise limited — Libya pegs its currency
to the SDR and transit fees through the Suez Canal are
calculated in SDRs — but some experts believe the SDR could
evolve over time into an important international reserve asset
alongside the dollar.

French Finance Minister Christine Lagarde said there was no
particular timetable for adding the yuan to the SDR, a step
that would come with strings attached.

“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 told a closing news conference.

Studies along those lines could start soon, she said.

As much as Beijing would like the kudos that being a
component of the SDR would entail, Chinese officials bristled
at the idea of strict conditions.

Yi Gang, a vice-governor of the central bank, disputed the
notion — voiced by European Central Bank Governor Jean-Claude
Trichet among others — that a currency must be freely-floating
before it can be included in the SDR.

Yu Yongding, a former central bank policy adviser, took
issue with the demand that an SDR component currency must be
managed by an independent central bank — a demand most
forcefully articulated by U.S. Treasury Secretary Timothy
Geithner.

The People’s Bank of China is far from autonomous: the most
important decisions concerning the exchange rate and monetary
policy are made by Communist Party leaders.

“It will take time for the RMB to be part of SDR,” Yu told
Reuters.

PROGRESS AHEAD?

Nevertheless, German Finance Minister Wolfgang Schaueble
said he expected more headway on the issue in coming months.

“I believe we made a lot of progress in this direction
today. I am confident that a lot will be achieved in this
direction in the French presidency,” he said.

In his prepared remarks for the seminar, Geithner
questioned whether an international effort was really needed to
cure the ills in the global monetary system. Inconsistency in
exchange rate policies was the biggest flaw, he said.
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Without naming China, he noted that some emerging countries
ran tightly-managed currency regimes that fuelled inflation
risks in their own economies, magnified appreciation pressures
in others and also generated calls for protectionism.

“This asymmetry in exchange rate policies creates a lot of
tension,” Geithner said. “This is the most important problem to
solve in the international monetary system today.”

But he said the solution was not complicated.

“It does not require a new treaty, or a new institution. It
can be achieved by national actions to follow through on the
work we have already begun in the G20 to promote more balanced
growth and address excessive imbalances,” he said.
(Additional reporting by Kevin Yao, Jason Subler, Xie Heng and
Langi Chiang; writing by Alan Wheatley; editing by Stephen
Nisbet)

REFILE-WRAPUP 3-G20 sets conditions for yuan to join SDR