China's Aug. 11 decision to give markets a bigger role in setting the renminbi's value against the dollar hasn't led to the currency war some feared, but it sets the stage for a pickup in capital markets volatility in Asia that could ultimately benefit managers of active investment strategies.
If initial concerns about competitive devaluations have evaporated, market participants still see the move having far-reaching ripple effects for the region.
“We believe this is a game changer,” medium term, that “fundamentally impacts the way we look at emerging market debt, particularly currencies and particularly in Asia,” said Mark Evans, a London-based investment analyst, emerging market debt and currency, with Investec Asset Management.
As the yen and the euro tumbled in recent years, the renminbi's stability made the currency an anchor, effectively constraining the volatility of other Asian currencies, Mr. Evans said. By contrast, in the new environment, “we will need to be highly selective in our country picks,” he said.
The move has “definitely changed investors' perceptions, particularly when you look at Asia,” said Ashley Perrott, a managing director and head of pan-Asia fixed income with UBS Global Asset Management in Singapore.
For example, said Mr. Perrott, the renminbi's very low volatility up until now made for “quite a comfortable carry trade” built around that currency — an “easy position for investors to have on.” But “the enemy of carry trades is volatility,” and the new regime will require investors to take a different approach to that currency, and Asia more broadly, he said.