China will have bumpy landing but that's okay: Rogoff

Markets world over were being overtly complacent about the Chinese slowdown risk and even the path from hereon looks bumpier than what the Chinese government is portraying, according to ace economist Kenneth Rogoff.In an interaction with CNBC-TV18's Menaka Doshi, Rogoff said that he does not foresee signs of recession in US or Europe and said the global economy would weather a Chinese slowdown fine.On India, Rogoff maintained that even as the government needed to up investment in infrastructure, it should focus on cutting down red tape and "getting things done".Below is the verbatim transcript of the interview.Q: Look at what is going on in the world, I think the first three weeks of this year have been dominated by headlines that talk of a downward spiral in equity markets everywhere. Are you surprised at what you are seeing happen in the markets?A: I can't say I perfectly anticipated it. I am not surprised that there are renewed concerns about China. I thought that the markets have become way to complacent about what was going on there. On the other hand people are talking of recession in the United States, recession in Europe, but I don’t see it in the data, anything is possible but we don’t see a lot of pre-recession signs in either place. US seems to be doing solidly. Q: You wrote a paper or a column on how you thought that we hadn't been able to capitalise on this big collapse in crude prices and that in normal circumstances it would have led to an increase in demand but that hasn’t happened yet. It is very good for India. Can you talk us through what forces these are that are preventing us from being able to make the most of this oil price decline and really what the implications of that are?A: There are few stages of it because it has declined several times going into this. However to the extent that it represents new supply, it is really hard to tell a story that it is a bad thing for the global economy. It is bad if you are an exporter but it is just like if you discovered more oil in India, it is not bad for the global economy but if you are an exporter and you are fragile fiscally it is very bad. So, the speed of the collapse caused concern but on the whole that story seems overdone as an explanation of what is going on.I think if you look in the world there are countries like India which subsidise energy a lot and instead of passing it through the consumers, not just India, all the emerging markets China just as much they have been hurting from the fiscal subsidies and they are kind of pulling back. So, it was sort of not absorbed into the lower deficits. If it goes lower more of it is going to get passed through.Q: What do you make of where the Yuan is today? Currency traders tell me they expect another 5 percent on the downside, continuous dollar strengthening, what will it mean for emerging market currencies like the Rupee which have been better off than many others?A: You have a floating currency in India and you are very lucky. The Chinese have made a huge mistake, they have done a lot of things right, this one they did not do right. They should have made the currency much more flexible 8 or 10 years ago, certainly a few years ago. They should have done it from a position of strength. The currency probably needs to sink more than 5 percent, may be much more but then come up. They are in a situation where capital outflows have got too big. There is too much trade, it is too easy to get money out of the country and it is hard to clamp down on the exchange rate. They are trying to put the genie back in the bottle, stop the capital  flows, it is very hard with as much trade as China. So, that remains a vulnerability but again it is really transitional problem, they ought to have a more flexible exchange rate. A 5 percent depreciation I don’t know what that would solve.Q: Is it just the currency or do you disagree with how the Chinese government and the PBoC have dealt with this rebalancing of their economy in the last few years?A: The larger problem is their effort to make it seem like nothing is going on and it is all smooth. We were saying 7 percent, it was 6.9 percent we are very disappointed. When you do an epic transition such as they are doing it is very hard to have very smooth numbers, not to have rocky patch as I have been saying for a long time. I think the big danger here is that I do think it is slowing down more than they say. I think growth is more likely in the 4-5 percent range as I have said for a long time. That is okay when you are rebalancing. However if they panic and then pump a lot of credit in to build more cement plants, more steel plants, more stuff they don’t need then they have a bigger credit default problem down the line. They already are facing a difficult debt overhang and if they panic it could get worse.Q: Would you compare this to the 2008 crisis?A: I don’t see that at all. I have heard that from some super smart people around here. In the worst case scenario it might feel like that in China but they are not as financially integrated as the United States, that would be very bad but I don’t see it in Europe and the United States. I have to say as 2008 unfolded the Europeans thought they were fine. So, you never know but the macro data is not yet showing that. China has some difficult problems to solve. I think it will be a much bumpier landing than I would say the Chinese economists are trying to project here. That is okay, the thing is not to panic and to adopt policies that cushion things over the longer run. If they do panic then it could get worse.Q: India seems to be in a sweeter spot  than the rest of the world, do you buy into that? The Finance Minister in India has this difficult choice to make between sticking to fiscal discipline and maybe diverting some money towards public infrastructure to help kickstart parts of  the economy as well as to relieve some rural stress. Which way should he go?A: I think infrastructure spending is essential. India's future depends on having infrastructure. There are many high return projects. It is pretty parallel to the United States, we don’t have high speed rail between Boston and New York because of right of way problems across the states, it is very similar trying to do anything in India. So, it is not just about the Budget, it is not just about managing money, it is about trying to get a system where you can move forward. It took ages to build that airport in Mumbai. India needs to improve on that, it needs to find a way that it can build infrastructure.