IMF chief urges China to let yuan rise

Strauss-Kahn: stronger yuan would boost domestic demand
* Dollar to remain dominant for at least a decade
* Warns world policymakers against early exit from stimulus

By Jason Subler and Simon Rabinovitch

BEIJING, Nov 16 (Reuters) - A stronger yuan is part of the policy mix that Beijing needs to increase domestic consumption and help ease global imbalances, the head of the International Monetary Fund said on Monday.

The comments by Dominique Strauss-Kahn, the IMF's managing director, add to a drumbeat of demands that China scrap its currency's peg to the dollar, reinstated 16 months ago to help the country's exporters weather the global recession.

A stronger currency is part of the package of necessary reforms, he said. Allowing the renminbi and other Asian currencies to rise would help increase the purchasing power of households, raise the labour share of income, and provide the right incentives to reorient investment.

Strauss-Kahn's remarks coincided with a visit to China by U.S. President Barack Obama, who has pledged to raise the exchange rate of the yuan, also known as the renminbi, as part of discussions on how to put the world economy on a more-even keel. [ID:nSP327252]

Strauss-Kahn noted that China was already taking steps, including wider healthcare coverage, to boost household spending by reducing people's need to save for a rainy day.

But more can be done to secure a lasting, structural shift towards consumption, by expanding the scope of social policies, moving ahead on financial sector reform, and undertaking corporate governance reforms, he said.

Conversely, countries with large current account deficits need to increase savings. And for many of them, including the United States, reducing budget deficits must take priority, he said.

DOLLAR TO STAY CURRENCY KING

Overall, the global economy appears to have turned a corner, Strauss-Kahn said, and the biggest risk to the outlook was a premature withdrawal of the massive monetary and fiscal stimulus to which governments have resorted to prop up demand.

While it is prudent to plan for so-called 'exit strategies,' policymakers should keep supportive measures in place until a recovery is firmly established, and particularly until conditions are in place for unemployment to decline, he said.

Despite problems, the current international monetary system was still working reasonably well, the IMF chief said.

Speaking later to students at Tsinghua University, Strauss-Kahn said the dollar's supremacy might come under attack from the euro, the yen and even the yuan in the long term, but it would remain the dominant global currency for at least a decade.

If you are talking about 10 years, I think it won't change very much. The dollar will still be the most important international currency, just for one reason: that is that the U.S. economy will still be the biggest economy in the world.

Strauss-Kahn said he favoured a bigger international role over time for the Special Drawing Right, the IMF's in-house unit of account.

Chinese central bank governor Zhou Xiaochuan proposed in March a beefed-up role for the SDR, which is a basket of four major currencies, saying it could eventually replace the dollar as the dominant global reserve currency.

It's not going to happen tomorrow morning, but it may happen in 10 years, in 15 years, Strauss-Kahn said.

The idea of creating a basket of currencies which would be the currency used for global trade, rather than using the currency of one country, meaning the U.S., giving this country a special advantage over others, that idea is a good one. (Editing by Alan Wheatley and Toby Chopra)