Tightly controlled exchange rate regimes are the main flaw in the international monetary system and the solution is simple, U.S. Treasury Secretary Timothy Geithner told a G20 meeting on Thursday.

In a thinly veiled swipe at the Chinese hosts of the seminar of the Group of 20 wealthy and developing economies, Geithner said that countries should have flexible exchange rates and permit free flows of capital to be major players in the global currency order.

He also used his speech to call for a stronger International Monetary Fund and to defend U.S. policies, acknowledging that past failures had caused much damage but saying the government was aiming to stabilize debt levels to avoid future problems.

The G20 seminar was spear-headed by France, which is pushing a bold reform agenda in its year-long presidency of the group, and was meant to be focused on ills in the monetary system.

Geithner offered a straightforward diagnosis. While major currencies moved freely and most emerging economies were well along that path, there were still some with little exchange rate flexibility and extensive capital controls, he said.

This asymmetry fueled inflation risks in the economies whose exchange rates are undervalued, magnified currency appreciation in others and also generated protectionist pressures, he added.

This is the most important problem to solve in the international monetary system today. But it is not a complicated problem to solve, he said, according to the prepared text of his remarks.

It does not require a new treaty, or a new institution. It can be achieved by national actions, he added.

Although Geithner did not mention China by name, the United States has long called on Beijing to let its currency rise more quickly, accusing it of keeping its exchange rate artificially cheap to give its exporters an unfair advantage.

In recent months, Geithner has taken to casting the Chinese currency as a broader global problem, saying that it is making life difficult for other developing economies. India and Brazil, among others, have agreed, saying that a cheap yuan has undermined their competitiveness.

The Chinese government told countries attending the G20 seminar in the eastern city of Nanjing not to mention specific currencies in their speeches and to keep their focus on broader questions in the global monetary system, according to a source attending the meeting.

PLAN FOR CHANGE

While saying that national governments held the key to reform in their own hands, Geithner called for a stronger International Monetary Fund to shine a spotlight on risks.

We would also support giving the IMF a greater capacity to help influence the policy choices made by the major economies, including greater independence to publish its analysis, he said.

The IMF should be able to make recommendations for how to preempt the emergence of large imbalances in the global economy, he said.

On the Special Drawing Right (SDR), the IMF's unit account that France and China believe should take on a bigger role in the international monetary system, Geithner was clear.

Both French President Nicolas Sarkozy and Chinese officials have said it is time to consider bringing the yuan into the basket of currencies that constitutes the SDR, which is currently restricted to the dollar, euro, yen and pound. Geithner suggested that certain conditions should be met first.

We believe that currencies of large economies heavily used in international trade and financial transactions should become part of the SDR basket, and that 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.

Emphasizing that solutions to the global monetary system's problems rest at the national level, Geithner said the United States had made progress in fixing the policy mistakes that caused damage in the global financial crisis but still had work to do.

We are committed to ... fiscal reforms that will reduce deficits as a share of the economy to three percent over the next several years so that we stabilize the ratio of debt to GDP at a level that will not threaten future economic growth, he said.

(Reporting by Simon Rabinovitch; Editing by Ken Wills)

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