China to allow further 4% yuan fall: Ex-IMF China chief

Below is the transcript of Eswar Prasad's interview with Latha Venkatesh & Sonia Shenoy on CNBC-TV18.

Latha: Will Yuan devaluation be now a constant strategy in China to boost their economy?

A: My sense is that the Chinese central bank the People's Bank of China is trying to use every tool in its arsenal to crop up growth, but the other monetary policy measures such as cuts and reserve ratios that banks are required to hold with the central bank or interest rates are not getting that much traction, so currently depreciation is seen as an additional measure.

Now given that China is trying to reduce restrictions on capital inflows and outflows and given the weaknesses in the Chinese economy, I suspect we will see money continuing to flow out of China and therefore pressure for the currency to continue depreciating.

The People's Bank of China is probably too astute to allow a very sharp depreciation beyond this point but if the market pushes it that way then that is going to help domestic growth. I think PBoC will use the room it has given itself to allow a gradual depreciation for the remainder of this year at least.

Sonia: Will the US Fed's decision to hike rates be impacted by the yuan devaluation. Could it be pushed back you think?

A: Given the fact that the US economy is not that open and this is relatively modest move by China at least so far. It is hard to imagine that this will have a major effect on the Fed's timing. The reality is that the Federal Reserve policymakers are still to a large extent driven by domestic developments rather than international developments and of course the strength of the dollar does hurt quarterly profits in the US. It could start biting into employment growth and if those indicators are not positive, it is likely the Fed will hold back on an interest rate hike but so long as there isn't a string of bad news coming out of the US economy, I do not think this is going to have a major effect on the Fed's decision.

Latha: You just said that the PBOC is too astute to allow too much of a depreciation, how much do you think the yuan will fall in 2015?

A: I would anticipate that on top of this 2 percent devaluation, the Chinese Central Bank might allow the currency to float down another 3-4 percent which again would be conditional on how strong the dollar is because if the dollar continues to remain strong or even become stronger relative to all other currencies that may lead China to move a little more aggressively but the paradoxical situation in terms of China\\'s relations with the US is the following. This move by China to allow for more market determined exchange rates is exactly what the US has been asking for but now the US is turning around and complaining that if China were to allow the market to determine the value of its currency then the currency would become too cheap. So it is a very uncomfortable situation that the US administration finds itself in because China has given it what the US has been asking for but now there is pressure from US Congress to take some action against China.

Sonia: How do you assess the impact on India itself, already there are whole host of sectors tyre, steel companies that have been reeling under pressure because of Chinese dumping as they call it?

A: Chinese exports are certainly going to become much more competitive in markets around the world if China allows the currency to continue depreciating and the difficult reality that China faces is that despite of measures to stoke domestic demand, consumption growth has remained relatively tepid and the economy is still aligned to a significant extent on investment growth which means that China is generating even more excess capacity in some industries where there is already a lot of excess capacity to begin with.

So, exports are going to become a very important safety valve for China and one of the reasons we may have seen this move to free up the renminbi and also get a small devaluation to get that started is that export growth has been very weak and if China is going to be looking much more to exports and that for an economy like India is certainly going to have repercussions because cheaper Chinese imports are going to be looking for markets worldwide and given the weak demand in China, it is going to be harder to export to China. So, trading partners of China like India are going to have a much tougher time because of their trading balance with China.