"Secondly, they should depreciate by a lot more than the roughly 3 percent that has happened so far," Lardy said, noting that a 3 percent currency depreciation will not have a measurable effect on China's exports.
Yi Gang, deputy governor of the PBOC and director of the State Administration of Foreign Exchange, has dismissed media reports that Chinese authorities had demanded 10-percent depreciation in the yuan by the end of 2015 in hopes of rescuing the country's slipping exports. "Under a managed floating exchange rate system, the value of the yuan is determined by the market," he said.
While there are some U.S. politicians who always want to criticize China's exchange rate policy, the grounds for criticizing China's new exchange rate move is "extremely weak", Lardy said, as "this move so far is relatively small and simply reflects market forces."
Lardy also said many analysts and media continue to focus on the weakness in China's industrial sector and fail to get the big picture of China's overall economic performance.
"They are still trying to figure out what's happening to the Chinese economy by looking at the industrial sector. But the industrial sector is not driving Chinese growth today the way it was in 2000s," Lardy said, noting that the service sector has been the biggest driver of China's economic growth for the last three years.
As one of the encouraging results of economic restructuring, the services sector increased 8.4 percent in the first half of 2015 and accounted for 49.5 percent of China's GDP.
Chinese households are spending a lot of money on entertainment, travel, health, education and other services than goods, which are driving the growth of the service sector to a considerable extent, Lardy explained, suggesting that the growth of disposable income will be one of the best indicators to gauge China's economic growth going forward.
While China's main stock market index has fallen about 40 percent since June, Lardy predicted it would have a relatively small impact on China's economy. "My conclusion is that in China...there's not much connection between what's happening in the equity market and what's happening in the real economy," he said.
Lardy believed China's medium growth potential is still in the neighborhood of 7 to 8 percent, given further fundamental economic reforms occurring in China.
"The main potential source of growth is greater productivity", particularly in the state-owned enterprises (SOEs), Lardy said, noting that China's SOEs' return on assets, a gauge of their productivity, was as low as about 3 percent, less than a half of the private-sector average.
If the return on assets of China's SOEs goes up by only one percentage point, it will add about 1.5 percentage points to China's GDP growth, Lardy said, adding that China needs to inject more competition in those sectors where state-owned firms remain dominated and improve their efficiency.
Despite the recent stock market turbulence in China, Lardy believed China's financial reforms would stay on track. "The central bank led by Zhou Xiaochuan seems to have a very clear vision of the time, path and sequence for reforms in the financial sector. They have been following this roadmap for several years. I think they will continue to do that," he said.
Lardy hailed the PBOC's decision on Tuesday to remove the interest rate ceiling on term deposits longer than one year, saying it's another step in the gradual process of interest rate liberalization and also an important step forward in financial reforms.
