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A good friend of mine recently said he was considering whether to purchase some office space for his Beijing-based company. Should he?

As a foreigner, he had already operated in China for five years. His business is sound and he plans to be around for at least another five. Given how hot the Beijing property market has been recently, he said it made sense to buy the office space to support his company's balance sheet over time. The mortgage he would pay is slightly more than current rent, but, according to him, the real kicker was the "inevitable" revaluation of the Chinese renminbi currency against the US dollar, especially if he can get a US dollar-denominated mortgage.

Talk about overkill! Along with his local joint-venture partner, his company is in the high-tech service sector and quite removed from the property or finance industries. If property prices have been rising, it must be time to buy before they get even higher! At the same time, unless you were living in one of China's sacred mountain-top monasteries, it has been almost impossible to avoid hearing about the so-called impending currency revaluation. But I think my friend's enthusiasm has gotten the best of him.

If you tell me your company wants to purchase office space as a means of reducing operating costs over time, especially if you expect to pay off a mortgage quickly, that's great. Such a transaction raises the odds that the purchase will be a sound investment for the company, which should boost future cash flows and help create shareholder value. The firm continues to focus on its core business, in this case, high-tech, and leaves property and currency speculation to, well, speculators.

But telling me you want to use leverage to buy property based on a potential revaluation of a currency is a whole other game. Further, one of the major points that my friend has missed about being a speculator is the necessity of having an exist strategy. Let's assume for moment that he is able to carry out his plan of obtaining US-dollar funding to buy an office in Beijing, which would then be followed by a revaluation of the renminbi. (I personally don't think such a move will happen soon, but that is another story.) In the jargon of finance, he is "long renminbi property" and "short a greenback loan."

In order to make money on this trade, he will need to cover each position with an opposite move. In other words, he will need to sell his office (short his renminbi property) and pay back the loan (long the dollar loan) post revaluation, using part of the proceeds from the sale of the office. His profit would come from the movement in the exchange rate as well as potential gains in property.

But is property and currency speculation what high-tech shareholders really want? What line of business are they really in? When they sell their office, what next? Buy another office? Go back to renting? My friend did not really have answers to these questions. Market rumours notwithstanding, the distinction between investing and speculating must be very clear for all business owners. Otherwise, you're basically asking for trouble.

Writing on finance and economics for the last 18 years, David Seto, CFA splits his time between Hong Kong and Beijing where he reads Chinese Classics and tries to revive his defunct band, Scarbelly. Any comments on his columns can be sent to dseto@btmbeijing.com.