In his latest Viewpoint column, Mr Yam said Hong Kong's monetary conditions would have remained easy without refinements, with the US interest rates having continued to increase since the federal funds target rate has been raised 16 times in a row since June 2004.

The interest-rate gap between the Hong Kong dollar and the US dollar would have become even wider than it was before the refinements were introduced.

Whether the inevitable catch-up would have been completed by now is anybody's guess, he says. But we are reasonably sure that the much bigger interest-rate gap would have made the catch-up much more destabilising, particularly to borrowers but possibly also to lenders, who are affected by the ability of borrowers to pay back their loans, he argues.

Mr Yam noted that had the refinements not been introduced, the Hong Kong dollar would have been a much more popular proxy for market participants to take speculative positions on the renminbi, and the shifts of sentiment about the renminbi exchange rate would have been reflected in considerably more volatile monetary conditions in Hong Kong.

Exchange-rate stability is a matter of market confidence in the exchange-rate policy, the mechanism for achieving stability, and the ability of the responsible institution to deliver it.

"By introducing an explicit Convertibility Undertaking on the strong side, the three refinements served to anchor exchange-rate expectations at a critical moment, when reform of the renminbi exchange-rate policy was about to be unveiled," he writes. 

"The market will find the undertaking a lot more credible than mere words and assurances from officials, even if they are supported by sound economic arguments."

Mr Yam hoped the three refinements will continue to anchor expectations firmly, as they did in the past year.

Good opportunity to liberalise capital account

As the Mainland economy and its current account are not so sensitive to changes in the exchange rate, people should therefore not expect the current-account surplus to be resolved by exchange-rate appreciation alone under a flexible exchange-rate system.

"Now seems to be a good opportunity to liberalise the capital account further and allow the large pool of domestic savings to seek higher risk-adjusted rates of return overseas," Mr Yam added.

Forging ahead, he said the authority will, as always, be watching the market closely, as the factors affecting the renminbi exchange rate continue to evolve: political pressure from the developed markets; progress in the Mainland's monetary and financial reform, including further liberalisation in the capital account; and developments in the current-account balance.