(Reuters) - French President Nicolas Sarkozy is gambling on drawing China into a multilateral dialogue on currency stability as the centrepiece of his forthcoming presidency of the G20 economic leadership forum.
Whether Beijing will agree is unclear. Western officials will be parsing the statements of Chinese Prime Minister Wen Jiabao on a European tour this week for clues.
Sarkozy has put reforming the international monetary system at the top of his agenda at a time when all the world's major economies are tempted to let their currencies depreciate in an attempt to rekindle export-led economic growth.
The United States accuses China of keeping its currency, the yuan, artificially low, hurting U.S. jobs and competitiveness.
If Sarkozy can persuade Beijing to engage in foreign exchange policy coordination in a G20 setting, he would pocket a political success that could boost his expected 2012 re-election bid and upstage his most dangerous potential challenger, IMF Managing Director Dominique Strauss-Kahn.
"Sarkozy always wants a big headline. With France taking over the G20, he wants something big on the agenda," said Joost Beaumont, European economist at ABN Amro.
"This also has a bit to do with smoothing Sarkozy's domestic political problems. His handling of the EU presidency at the peak of the (financial) crisis earned him a lot of credit at home, and now he hopes he can pull off the same trick on the global currency issues."
French diplomats say Paris has been holding preparatory talks with major partners, including China, for months on its G20 agenda. Sarkozy suggested in August holding a conference of experts in China on a new international monetary order.
CONTACT GROUP
Some G20 diplomats say the fact that the president went public with the idea suggests he already has an indication of Chinese acceptance, which might be announced when President Hu Jintao visits Paris in November.
Officials in Sarkozy's office deny any secret agreement.
"Intuitively, I would be very surprised if the Chinese would have done a deal with the French," said analyst Carsten Brzeski at ING Financial markets.
"Sure, France will have done consultations ahead of the G20 but earlier experience -- just think of the climate conference -- has shown that China only considers the United States a partner at its own eye level, but the same is not yet the case for the Europeans," he said. "A deal is very unlikely but it is obvious that pressure on China is increasing."
France has reassured suspicious Western partners that it is not seeking fixed exchange rates of the type established by the 1944 Bretton Woods conference which created the International Monetary Fund at the end of World War Two.
Nor is it proposing to replace the dollar as the main international reserve currency, although a G20 monetary forum could discuss longer-term Chinese ideas for making more use of the IMF's Special Drawing Right as a virtual global currency.
Diplomats involved in the preparations say the French aim is more modestly to establish a G20 forum for regular dialogue about currency developments which could give guidance to markets on the major powers' thinking.
Finance ministers and central bankers of the Group of Seven major industrialized economies -- the United States, Japan, Germany, France, Britain, Italy and Canada -- have played this role since the 1970s, meeting regularly to discuss foreign exchange issues and issuing joint statements.
French officials contend that the G7 -- which meets later this week -- is no longer the right place since it does not include China, India, Brazil, Russia or Saudi Arabia. A G20 currency forum could fulfill that function.
"If he can get agreement to a contact group on exchange rates, that would be an achievement. He can say that no one wanted to touch this issue before," one G20 diplomat said.
WHAT'S IN IT FOR CHINA?
The United States may well be supportive since Treasury Secretary Timothy Geithner seems keen to find a more effective and less vitriolic approach to coaxing China to allow the yuan to appreciate than their current bilateral megaphone dialogue.
A high-level U.S. team led by Under Secretary of State for Economic Affairs Robert Hormats was in Paris on Monday to discover more about French thinking on the G20 agenda.
The U.S. Congress, in the build-up to mid-term elections, is applying ever more shrill pressure on the Obama administration to brand Beijing a currency manipulator and take retaliatory trade restrictions if it does not let the yuan rise.
Geithner said in Senate testimony on September 16 he expected "a significant focus of attention ... on China's exchange rate policy" at the next G20 summit in Seoul in November.
The Europeans are less outspoken, partly because their terms of trade with Beijing improved as the euro fell from $1.60 in mid-2008 to below $1.20 in July, while the yuan remained pegged to the dollar, although that trend has since reversed, with the euro back up around $1.37.
Fragmented Europeans are also less practiced at wielding economic power by linking trade to foreign exchange policy.
On the first leg of his European tour in Athens, Wen said on Sunday that Beijing supported a stable euro and will not reduce its holdings of European bonds. He also promised to support debt-stricken Greece's economy but made no comment on the yuan.
His emollient speech to the Greek parliament appeared aimed at deflecting criticism of China's currency policy in talks with euro zone officials in Brussels on Monday night and Tuesday.
A euro zone policymaker said Beijing was skilled at making gestures just ahead of major deadlines such as the announcement of a more flexible yuan exchange rate just before the June G20 summit in Toronto, only to revert to its old ways afterwards.
"They play us for fools," the official said. "That may work once or twice, but if there is no reciprocity, we will have to start drawing a line."
Some Western G20 diplomats are skeptical of Chinese willingness to be drawn into a G20 dialogue on currencies given the ruling Communist Party's insistence on monetary sovereignty. Any such talks could be seen as the thin end of a wedge.
They recall that Beijing refused to allow the G20 to praise its decision to make the yuan exchange rate more flexible in June to avoid creating a precedent of the issue being a legitimate subject for multilateral discussion.
"What's in it for China?" one European monetary diplomat asked. "A way of deflecting the U.S. Congress? But would that work? Enhanced status? But doesn't China already have that by making the world come to its door to beg for currency relief?
"A bigger say in global monetary affairs? But won't China get that anyway as its economy expands?"
(Additional reporting by Daniel Flynn and Brian Love in Paris and Brian Rohan in Berlin, editing by Mike Peacock)
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