The financial crisis has laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if that will take many years, Chinese officials said in comments published on Monday.

The push for fundamental, if gradual, reform of the international financial system comes just before the Group of Eight summit in Italy, where China's willingness to question the dollar's role could fuel debate.

The Special Drawing Right (SDR), a unit of account used by the International Monetary Fund, presents a viable alternative to the dollar as a global reserve currency, said Li Ruogu, chairman of the Export-Import Bank of China, a major state-run bank.

It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system, Li was cited as saying in Financial News, a newspaper published by the central bank.

The People's Bank of China made waves in March when it first suggested that the SDR, whose exchange rate is determined by a mixture of dollars, euros, sterling and yen, was better suited than any single currency to be a yardstick for global trade and a reliable store of value.

The financial crisis caused the global economy to suffer heavy losses and it also let us clearly see how unreasonable the current international monetary system is, Li, a former central bank vice governor, said.

But it would be difficult to find and implement a feasible replacement plan in the short term, so we will still have to travel a relatively long road for reform of the international monetary system.

Li's warning was echoed by Wang Xin, a central bank economist, who said it would be impossible to get there in one step.

Wang, head of the central bank's financial research department, said that China was inching toward the internationalization of the yuan with the launch of a pilot programme to allow companies to settle some goods trade in the Chinese currency.

Only when the yuan has achieved basic convertibility and when domestic financial markets are fully opened can the yuan truly become an international trade settlement currency and store of value, he said, also in comments carried by the Financial News.

INTERNAL TENSION

The tension between China's vision for a radical overhaul of the global financial system and its big stake in the existing order has been on display in the run-up to the G8 summit, which starts on Wednesday in Italy.

China holds an estimated 70 percent of its $1.95 trillion in official foreign exchange reserves in the dollar and is wary of saying anything that would undermine the value of its investments.

On Sunday, Chinese Vice Foreign Minister He Yafei said the dollar would stay the world's dominant currency for many years to come and that talk of creating a super-sovereign alternative was confined to academic circles.

Officials from other countries who will attend this week's G8 summit have said that Beijing has asked for discussion there about the future of reserve currencies. He Yafei has said that he was unaware of China making such a request.

Giving a sense of the extended timeframe that China might have in mind, Li Yang, a former central bank adviser, said over the weekend that the process of building up the SDR could take 30 to 50 years.

But Li, a senior researcher at the Chinese Academy of Social Sciences, the government's leading think tank, did not mince his words in passing a verdict on the dollar.

When a country that issues a reserve currency has a long-term trade deficit, then that currency is no longer suitable to be a reserve currency and the process to replace it should start, he was quoted as saying by local media.

Up until now there has been no currency strong enough to replace it, so while the process to replace it has begun, it is far from complete, he said.

Chinese President Hu Jintao has steered clear of any statements that could roil financial markets in the G8 lead-up. The closest he has come to the dollar has been to say that countries which issue reserve currencies should submit to closer oversight.

Sources involved in preparation of the meetings said Brazil and India backed Beijing's call for debate but there was consensus among the G8 countries, at least, that nothing of significance could or should materialize at this stage.

(Editing by Tomasz Janowski)

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