Nations risk losing a window of opportunity to fix the global financial system in the wake of the credit crisis if they do not push reforms through soon, the head of the International Monetary Fund warned Wednesday.

Stressing the need for cooperation, Dominique Strauss-Kahn also noted China’s currency, the renminbi, was undervalued but said he expected it would appreciate as China starts to rely more on domestic demand, helping to rebalance global surpluses and deficits.

He told European lawmakers that he was worried that countries’ “receding” commitment to international efforts to overhaul the world economy and the financial system in the wake of a blistering financial crisis could trigger protectionism.

“We have a system with holes and go-it-alone national regulation,” he told members of national parliaments from across the EU.

“In the period we are in now, the risk will be … in many countries, under political pressure that governments will begin to implement various solutions,” he said, warning that national rules could be harmful to other parts of the world.

The United States recently criticized European moves to regulate hedge funds that they fear could block American funds from the EU. European Union officials also snipe that they must draft rules because U.S. financial oversight of the world’s biggest banks and funds is insufficient.

Both are supposed to stick to guidelines set out by the Group of 20 rich and emerging economies at summits last year that aimed to make deep changes to the way countries supervise financial actors and manage the global economy.

Strauss-Kahn called for a better balance of global demand, saying some countries’ massive build-up of reserves is straining the global monetary system.

The comment was aimed at China, which the U.S. and others have criticized for intervening keep its currency at a low level. This cuts the price of Chinese goods for Americans and Europeans, causing a huge trade flow of exports in one direction.[Read More]