BRUSSELS, March 29 (Reuters) - An overhaul of the global monetary system by the world's top 20 economies should entail a bigger role for the IMF's SDR reserve asset and the inclusion of China's renminbi in the Special Drawing Rights, the influential Brussels-based Bruegel think tank said.
In a paper by the Bruegel's head Jean Pisany-Ferry, Agnes Benassy-Quere of France's CEPII think tank and Yu Yongding, a former academic adviser to China's central bank, the three economists said the overhaul should also include international monitoring of exchange rates and stronger financial safety nets.
The call comes before G20 finance ministers and central bankers meet in mid-April in Washington, where the international monetary system will be one of the topics discussed.
A basket of four currencies -- the dollar, euro, pound sterling and Japanese yen -- make up the International Monetary Fund's Special Drawing Rights which can be used as an international reserve asset.
Created in 1969, SDRs do not reflect the rise of China to become the second biggest economy in the world after the United States.
The world's 20 biggest developing and developed economies, the G20, are discussing ways to overhaul the global monetary system to adjust it to changing realities and prevent economic and financial crises.
The three economists said there was little chance of a grand redesign of the monetary system in the short term, but concrete steps should still be taken. G20 leaders will meet to discuss the issue in France in November.
"First, consensus is needed on exchange rates, capital flows and reserves. This consensus is closer than often assumed, and should be codified in some form of soft law, with provisions for surveillance agreed on," the economists said.
"Second, financial safety nets must be improved so that countries do not have to self-insure by accumulating reserves. The least difficult route could be a new regime for deciding on Special Drawing Right allocations that would facilitate more frequent use of this instrument," they said.
"Third, a change in the composition of the SDR should be planned for, to strengthen the multilateral framework by including the renminbi. These reforms would be a partial move, and would prepare the ground for further developments."
Many G20 countries would like to see the Chinese currency included in the SDR basket as a way of better engaging China in global economic governance, but not before Beijing allows the exchange rate of the mow managed currency to be set by the market.
A free float of the yuan would entail its appreciation and China is reluctant to allow this to happen too quickly for fear of killing off its vibrant exports sector.
"We suggest adapting the existing SDR to the new global environment through more frequent allocations, and by planning the inclusion of the renminbi in the SDR basket in the context of an opening up of China's financial account and a move towards a flexible exchange-rate regime in China," the paper said.
The three economists also said the role of the SDRs, of which there are 204 billion currently in issue ($318 billion), should be expanded with more allocations of the asset to IMF members.
"They would provide countries with SDR reserves that they could exchange for reserves denominated in the currency of their choice," the paper said.
"If provided in limited volumes and in response to increases in the demand for reserves only, such allocations would be unlikely to have far-reaching consequences for global liquidity while providing a welcome buffer for vulnerable countries," the economists said.
(Reporting by Jan Strupczewski, editing by Stephen Nisbet)