* Sarkozy has receptive audience as G20 presidency begins
* France, China both keen to internationalise the yuan
* Latest U.S. quantitative easing strengthens France's case
* Technical, political obstacles to expanded use of SDRs
By Daniel Flynn
PARIS, Nov 26 (Reuters) - Weaning the global monetary system off its reliance on the dollar has eluded policy makers for decades, but the wind may now be blowing in France's favour as it seeks to build a consensus for change.
Finding ways to diversify countries' international reserves away from the U.S. currency is a key part of French President Nicolas Sarkozy's plan to sketch out a blueprint for a more stable monetary system during France's year-long presidency of the Group of 20 nations, which began this month.
In the wake of the 2008-09 global financial crisis, France, which has long argued dollar volatility damages European economies, is finding common cause with emerging powers such as China and Brazil.
"The time may have finally come because it's not just France thinking about this: the dollar is becoming destabilising for a lot of countries," said DeAnne Julius, chairman of London's Chatham House institute of international affairs. "France has a good chance of making significant progress."
French officials say their agenda hinges on convincing the Chinese, whom Sarkozy has assiduously courted, to agree to a greater role for the yuan as a reserve currency. This would initially be done by having the yuan enter the Special Drawing Right, an International Monetary Fund accounting tool currently based on the values of the dollar, euro, yen and sterling.
China's central bank chief proposed last year that the SDR be turned into an international currency based on John Maynard Keynes' 1944 idea of a "Bancor". The idea won backing from Brazil at a G20 summit meeting last month.
No one expects a "big bang" move to a supranational currency; the shift away from the dollar would take many years, possibly decades. But France wants to revive the debate on the role of the SDR as part of a gradual move toward a multipolar currency system.
"There are some concrete things we can do," said a senior French official. "For example, what timeframe do we set for the renminbi to enter the SDR? Next year? In 10 years? This is something we can decide. The Chinese are ready to discuss this."
ANXIETY IN BEIJING
The U.S. Federal Reserve's decision this month to conduct more quantitative easing, effectively printing money to buy government debt, was strongly criticised as destabilising by many governments and may well have strengthened France's case.
In particular, the U.S. decision fanned anxiety in Beijing -- which has some two-thirds of its $2.65 trillion foreign reserves in the U.S. currency -- that the dollar is no longer a stable store of value.
Wading into the debate on how to improve the global monetary order, Chinese President Hu Jintao called at a Seoul G20 summit this month for "an international reserve currency system with stable value, rule-based issuance and manageable supply".
Amid fears that tensions between Washington and Beijing might provoke a "currency war", in which governments would battle each other to influence exchange rates to their advantage, the Seoul summit asked France's presidency to develop "indicative guidelines" to measure if countries had excessive current account surpluses or deficits.
"This is more useful politically than economically, because it helps take the pressure off the currency issue," Julius said.
China, with its attention gripped by domestic inflation, has allowed its currency to appreciate modestly in the last few months while angrily rejecting pressure from Washington to quicken the pace.
Beijing has already taken steps to internationalise the yuan, allowing trade to be settled in yuan and permitting this money to be reinvested in its domestic bond market, as well as establishing renmimbi swap lines with several central banks.
It says it aims to build Shanghai into an international financial centre by 2020, implying the yuan will be fully convertible by then. But including the yuan in the SDR could encourage Beijing to accelerate its capital account liberalisation, as Washington demands.
"The smart thing for the IMF to do would be to put the yuan in the SDR basket today," said Jim O'Neill, chairman of Goldman Sachs Asset Management. "Then the SDR would also have some obvious appeal to the private sector: this could quite rapidly open the door to less dependence on the dollar."
The SDR currently accounts for just 4 percent of global reserves, or $308 billion. The four currencies which make up the SDR account for only 46 percent of world trade, according to ING bank. As the world's largest exporter, China wants to be admitted.
A five-year review of the SDR basket completed this month excluded the yuan again because it is not freely usable as a reserve currency and in trade, but the IMF said the issue would be kept under review.
"I now feel more relaxed that the renminbi can be brought into the SDR before full capital account convertibility," Julius said, adding that a revision of the SDR over the next year might decide initially to set the yuan's weight at around 5 percent.
"EXORBITANT PRIVILEGE"
France, an architect of the euro, has a tradition of driving monetary change. In the 1960s, Charles de Gaulle's government slammed the dollar's "exorbitant privilege" as a reserve currency and pressured Washington to drop the dollar's link to gold by swapping dollars for tonnes of U.S. bullion.
In Sarkozy and his charismatic Economy Minister Christine Lagarde, France has a formidable negotiating team to press for change. In a visit to Paris this month, Hu agreed to Sarkozy's request for China to host a conference on monetary reform next spring.
"China supports the reform agenda in principle," said Wang Yong of Beijing University's Centre for International Political Economy.
"But there's no sign China is willing to pay the price to confront the U.S. on this if it strongly resists reform," he added.
A source close to French policy said it might be hard to get Washington, which remains the largest IMF shareholder and has a veto over key decisions, to let the yuan enter the SDR quickly as Washington would then lose an important bargaining chip with China.
In the longer term, plans to increase the role of the SDR as a reserve currency face other problems.
Firstly, the system lacks liquidity and would need a massive issuance of SDRs, which creditor nations have traditionally resisted. However, the increased clout of emerging economies at the IMF, after this year's deal to give them more voting power in the body, might ease this process, which could be achieved via regular allocations set by the Fund.
Secondly, the private sector would need to be allowed to hold SDRs. This could be achieved by permitting commercial banks to open SDR accounts, by encouraging commodity producers to quote prices in SDRs, which would lessen volatility, and by mandating the IMF to set up a clearing system, Julius said.
Thirdly, the reform would require the IMF to play a far greater role as the world's "central bank" administering global reserves. Supporters of change argue this could have the benefit of encouraging emerging countries to lower their high levels of reserves, which bring no economic benefit to their populations.
It is not clear, however, whether events will permit France to focus consistently enough on the SDR at G20 meetings to lay the base for significant reform. If an international bailout of Ireland fails to halt the contagion spreading through the European debt market, France's G20 agenda could be hijacked.
"If the euro zone crisis doesn't calm down, everyone will be in emergency mode. Questions of global imbalances and monetary reform will be overtaken by more pressing issues," said Deutsche Bank's senior European economist Gilles Moec. (Additional reporting by Paul Taylor; Editing by Catherine Bremer and Andrew Torchia)