Market expectations that the renminbi will appreciate towards, or beyond, 7.80 to the US dollar have a psychological significance. But they have no bearing on determining Hong Kong's exchange-rate policy, Hong Kong Monetary Authority chief Joseph Yam says.

Writing in his weekly Viewpoint column, Mr Yam notes the renminbi has been trading at below RMB8 yuan to the US dollar for some time now. "There is nothing significant about the number eight, other than that it is a round number and one that rhymes with 'fortune' in Chinese," he says.

"But it was ... one of those psychological levels that might trigger unusual market reaction, not just in the forward exchange rate of the renminbi, but also in the spot and forward exchange rates of the currencies of jurisdictions having a close economic relationship with the Mainland, notably the Hong Kong dollar."

When the psychological level was breached, no significant market movement occurred and the Hong Kong dollar exchange rate remained stable. The interbank rates for the Hong Kong dollar also remained stable, although at a significant discount relative to US interest rates.

This, Mr Yam notes, is partly because the Aggregate Balance - or supply of interbank liquidity - has been larger than necessary except when there are large initial public offerings of shares, and partly because Hong Kong has a rather low loan-to-deposit ratio.

It is not the authority's normal practice to engage in money-market fine-tuning, though, "mainly to avoid its being misunderstood as an unorthodox attempt to pursue an independent interest-rate policy for a freely convertible currency with a fixed exchange rate - an attempt that has a low probability of success," he writes.

Psychological level likely to be breached soon

Perhaps of greater interest to the market now are the market expectations that the renminbi exchange rate will appreciate towards 7.80, again, because of the market perception of it as a psychological level - one that is likely to be breached soon, Mr Yam suggests.

"We should not underestimate the reaction of the public when one day they see that their HK$100, which used to buy more than RMB100 yuan, now buy less. In layman's terms, the renminbi appreciates from being 'smaller' to 'bigger' than the Hong Kong dollar.

"As Mainland China's economic development catches up with the rest of the world, its goods and services will inevitably become more expensive, either through a more expensive currency or through faster increases in domestic prices."