The central government's moves to slow record property price gains and allow the yuan to appreciate may stymie Hong Kong's efforts to contain surging home prices and a potential property bubble.

A stronger yuan would make the city's homes more affordable to mainland buyers, who have helped drive a 38 percent jump in home prices since end-2008, and fuel further increases, seven out of nine analysts surveyed by Bloomberg News said.

Cheung Kong (Holdings) Ltd, billionaire Li Ka-shing's property flagship, agrees with those who say a rising yuan will benefit the city's real estate sellers.

"If the yuan appreciates, it will make our Hong Kong property even more attractive," said Justin Chiu, an executive director at Cheung Kong.

Speculation is running high that Beijing may allow the yuan to appreciate as it tries to avert the bursting of asset bubbles after stimulating an economic recovery last year with record new loans.

Beijing will allow the yuan to appreciate by June 30 to curb inflation, a survey of analysts showed last week, while options prices suggest Hong Kong will maintain its 26-year-old peg to the greenback.

Meanwhile, the central government is stepping up measures to rein in the real-estate market after a record increase in home prices in March.

The central government's tightening moves are likely to send some real estate investors to Hong Kong for new opportunities, analysts believe.

"People who have sold their property on the mainland and are looking for opportunities will probably come to Hong Kong," said UBS property analyst Eric Wong.

"If their funds are tied to property in the mainland and they can't get rid of it, it may be tough - given the government's crackdown", he said.

UBS forecasts Hong Kong home prices could rise another 27 percent by 2011 from current levels, Wong said.

"Mainland buying is the most important factor driving up Hong Kong luxury home prices," said Louis Chan, managing director of residential properties at Centaline, adding that a stronger yuan would "be positive for luxury properties, as they like to buy those that cost between HK$20 million and HK$30 million".

He likened rich mainlanders to wealthy Hong Kong residents buying properties in London. "These people have deep pockets; (mainland) Chinese buy Hong Kong homes as investments," Chan said, noting that turnover is quick here and there are no government constraints on property transactions.

A stronger yuan may also entice local residents to buy property as a hedge against inflation, which is likely to rise as imports from the mainland become more expensive, analysts said.

Hong Kong's inflation accelerated to a 13-month high in February, with prices gaining 2.8 percent. Low interest rates, coupled with an inflow of mainland buyers, led Hong Kong's home values to rise 29 percent last year, with luxury residences climbing 45 percent.

Last year, about 19 percent of people who bought luxury properties - those that cost at least HK$10 million each - were from the mainland, Centaline said.

Bloomberg News

(HK Edition 04/22/2010 page2)