Since the beginning of October 2006, the yuan has climbed at an annual rate of 13 percent against the US dollar - its fastest pace since China dropped the peg to the US currency in July 2005.

Since 2005, it has appreciated by a total of 14 percent. The offshore forward market is expected to price in another 8 percent increase over the next 12 months; several economists are even betting on a rise of 10 percent or more.

In 2005, Morris Goldstein and Nicholas Lardy at the Peterson Institute for International Economics estimated that the yuan was 20 to 25 percent undervalued.

By late 2007, they thought it was at least 30 to 40 percent undervalued, despite its gain over the previous two years.

So it's no wonder that in the past few weeks the financial markets have speculated about the revaluation of the yuan currency.

There were even media reports that a revaluation was in the cards. A strong case was being made for a revaluation to curb inflationary pressures and ease the burden of residents.

But some international investors have started worrying that the revaluation will fade the attraction of China's real estate market.

In fact, revaluation of the renminbi will have a minimal impact on the real estate sector in China even though it will translate into bigger costs for the overseas buyers. This is primarily because the market's fortunes have been dictated by other economic fundamentals that still remain strong in China.

But what could be in store for the overseas investors as far as China real estate is concerned? China's luxury residential market, especially, has relied quite heavily on such investments, and in 2007, some market analysts even suggested that new heights were reached.

According to Vigers Research, there need not be concerns. Firstly, going by fundamentals, average rental incomes will continue to rise and the capital value will grow over time. This could easily offset any increased costs due to appreciation in the currency value in acquiring the property.

Secondly, it helps that some foreign currencies, such as the euro and the pound sterling, were also making strong gains against the dollar and even the renminbi.

It must be noted that the real estate prices in China may still continue to increase due to demand and other factors, but the rate of increase should be less if an upward revaluation of yuan occurs. All will be eagerly watched.

The author is the managing director of Vigers Asia Pacific.

(HK Edition 04/09/2008 page3)