An appreciation in the value of the yuan would benefit Hong Kong by narrowing price differences between the city and the mainland, the Monetary Authority chief said yesterday. Joseph Yam Chi-kwong said if the yuan did appreciate it would help solve the deflation problem as a stronger yuan and a weaker US dollar would lower prices for goods and services in Hong Kong. This would encourage people to stay in Hong Kong and spend, rather than enjoying their free time in mainland cities. Mr Yam, who was speaking to legislators at a financial affairs panel meeting, did not comment on the implications for Hong Kong if the yuan depreciated. It was the first time the authority chief had commented on how any change in yuan policy would affect Hong Kong. 'Under the one-country, two-currencies system, it would be inevitable that any changes in one currency may affect another. But I think any such volatilities would not be very substantial,' he said. Legislator Henry Wu King-cheong, who represents the financial services sector, said he was worried about the negative impact of any devaluation in the yuan. 'Hong Kong is facing deflation and huge deficit problems. If there is a devaluation of the yuan it may further damage the local economy,' he said. Mr Yam said that he was confident that any change in China's foreign exchange policies would be beneficial to Hong Kong in the long term. But for the short term, he said it would be market reaction to such policy changes that would affect the local currency. In light of the close economic and financial links between Hong Kong and the mainland, a change in the yuan exchange rate policy could affect people's perceptions about the Hong Kong dollar, he said. Despite increased external pressure for a revaluation of the yuan, the mainland still maintained substantial capital controls and there were risks that the yuan may depreciate if the mainland was to relax some of these controls. 'We are keeping a close dialogue with the mainland authorities to discuss how these changes would affect Hong Kong,' Mr Yam said. He said his remarks had not been made as a result of receiving any inside information about a change in the yuan policy. He had heard nothing and was not going to make any predictions about changes in the mainland's foreign exchange policies. But he wanted to see more analysis on how any changes regarding the yuan would affect Hong Kong. Mr Yam said a war in Iraq would lead to a weaker US dollar and a weaker local currency under the dollar peg system. This would improve Hong Kong's competitiveness. He also rejected reports that the Hong Kong Mortgage Corporation had decided to scrap the plan to launch 140 per cent mortgage insurance for homeowners with negative equity, saying the corporation would make a decision next month.