Can yuan's fall push growth in slowing Chinese economy?

Emerging markets got a minor shudder when on Wednesday last week the Chinese yuan suddenly depreciated by 1 percent in a single day. In the past such depreciation has been spread over several weeks, if not months.

It barely moves 0.2 percent in a day with the Chinese People Banks of China (PBoC) setting a daily band of movement for the currency at 0.2 percent of the previous day's closing.

Also Read: Will depreciating Yuan take toll on other Asian currencies?

Does this sudden depreciation indicate that China is worried about its slowing growth? A large part of the slowdown in China has been caused because yuan's steady appreciation at a compounded annual growth rate (CAGR) of 3.5 percent since 2005 and that has now begun to dent Chinese exports. But this ties in with China's long-term goal of shifting away from dependence on exports to dependence on domestic consumption.

CNBC-TV18 spoke to Arnab Das, MD, Roubini Global Economics, Richard Titherington, JP Morgan and Chetan Ahya, MD, Morgan Stanley Asia Pacific to know what financial markets expect from the world's second largest economy and whether China is rethinking its strategy altogether.

Below are the excerpts from the interview:

Q: Why did the PBoC allowed such a sharp depreciation of yuan last week? Should we expect more of this?

Das: There are different things going on. One, the devaluation is being used to discourage hot money capital inflows, two, putting a tap on the accelerator to regenerate some steam in the slowing economy.

However, against the backdrop of trying to promote exports and discourage capital inflows, the underlying policy theme that Chinese authorities have recognised is that they must rebalance the economy away from the exports to the west and the United States in particular and also away from very heavy investment in construction towards consumption.

I think what they are grappling with is that transition is difficult and involves significantly slower growth. At the same time the process means that the accumulated stock of directed credit which is turning into bad loans will be a problem. So, they don't want to have an avalanche of that problem. If they can keep a bit of investment process and a bit of export process going, they can help manage all these things more smoothly.

Q: Do you think it is as long-term as this because there are some people who believe that the depreciation was a transitory one off thing? How have you read the yuan depreciation last week?

Titherington: I think the PBoC – the Chinese central bank was a bit concerned about the extent of the flows into the yuan, particularly the offshore yuan – the CNH and they want to remind people that the currency can move in two directions and so, it is not one way bet. The weakness that you have seen whilst it has made the market very nervous is more likely to be transitory rather than a fundamental change in direction.

Q: Should we interpret this as a means whereby the Chinese are trying to get back some export markets because they are worried about slowing growth?

Titherington: No, I don't think that is likely and that is certainly not our base case.

Q: What is your sense on the yuan depreciation?

Ahya: This is essentially aimed at checking the speculation on one way bet. Also, China's current account surplus has narrowed quite significantly. Now, it is about 1.8-2 percent of GDP. To that extent, they need to get the market prepared for a two way movement. It is no more like a huge current account surplus which means that they have to continuously appreciate. To ensure that the market gets enough notice on the two way movement, they have engineered this intervention.

The fact that this is engineered by them is also reflected in the fact that the interest rates in the interbank markets have collapsed quite a lot. Other emerging markets currency used to depreciate with lack of confidence and the interest rates in the domestic market also used to move up. With respect to China, the interest rates are going down, so, this is definitely done with a lot of control by the central bank and is really targeting the speculators.