Opening a yuan deposit account in the city or on the mainland through a Hong Kong bank has become popular as investors seek higher returns. With the Hong Kong dollar deposit rate close to zero per cent, investors putting their savings into banks are losing money when inflation is factored in.

The yuan has risen more than 15 per cent against the US dollar since it was revalued in July 2005. It gained 4 per cent last quarter and 6.9 per cent last year.

Analysts expect the yuan will rise another 10 per cent to 15 per cent this year as the mainland central bank seeks to curb inflation. Some even speculate that there may be another revaluation of the currency.

Mr Yam told the Legislative Council's financial affairs panel yesterday that another revaluation was arguable, adding that if it had happened once, it could happen again.

However, he said no economy could support a currency appreciating forever, adding that a slowdown of the US economy could affect mainland exports which in turn could impact on the value of the yuan.

'The yuan will not rise forever and it won't be a surprise if there's some change in the short term,' Mr Yam said, citing the US dollar's recent rise of more than 2 per cent against key currencies.

The yuan rose beyond 7 to the US dollar last month and closed at 7.0014 yesterday, compared with 7.0100 on Friday last week.

Mr Yam said that investors should be aware of the currency risk when they buy or sell yuan.

He also said that depositors should be clear about any other limitations when they opened a yuan account in the mainland.

Law Ka-chung, a chief economist and strategist at Bank of Communications, agreed that the pace of the yuan's appreciation could slow in the second half of the year when inflation stabilises.

Seeking gains

City's low interest rates encourage depositors to look elsewhere

The amount of yuan deposits in Hong Kong at the end of last month: 57.6b yuan