An appreciation of Chinese mainland's currency could reignite speculative flows into Hong Kong property and other assets and increase inflationary pressure, warned the territory's de facto central bank.

"While the trade and demand effects of a renminbi appreciation are likely to be only moderate due to offsetting influences of direct and entrepot trade, the impact on asset markets is potentially more significant," the Hong Kong Monetary Authority (HKMA) said in its half-yearly report on Wednesday.

"In particular, speculative capital flow into the mainland could spill over into the Hong Kong markets, feeding speculation in the property market and increasing general inflationary pressures," the HKMA said.

Speculative flows into Hong Kong on expectations the mainland could soon revalue its currency have eased in the past month since the HKMA introduced a ceiling for the Hong Kong dollar - which is pegged to the US dollar - in a bid to ward off speculators and normalize interest rates.

A stronger renminbi, also known as the yuan, could trigger a sudden rise in inflation because Hong Kong imports most of its food and basic necessities from the mainland. Rising inflation could potentially hurt domestic demand through a negative income effect, the report said.

At the moment, inflation is modest with the government forecasting the consumer price index will rise 1.5 per cent this year.

Joseph Yam, chief executive of the HKMA, has already warned that speculative flows into property could trigger an asset price bubble.

The overall impact on Hong Kong of a stronger renminbi would be mixed, the report said. On the positive side, mainland tourists' spending power would increase and Hong Kong's domestic exports would become more competitive.

(HK Edition 06/16/2005 page3)