Hong Kong doesn't need to let its currency catch up to the rising yuan because the differential will benefit the city by stoking Chinese mainland demand for its tourism and financial services, economists said yesterday.

"A wealthy China with a stronger exchange rate is likely to lead to more mainland buying interest," Dong Tao, a senior economist at Credit Suisse, said in a report.

"Hong Kong's challenge is not competing against the mainland but tapping its rapidly rising demand and bright prospects."

The People's Bank of China last July allowed the yuan to rise against the United States dollar by re-pegging it to a basket of currencies such as the yen and euro. It has since gained 5 percent in value against the US dollar.

In contrast, Hong Kong continues to link its currency to the US dollar.

The yuan closed yesterday at 1.00711 against the Hong Kong dollar on the interbank market, compared with a reference rate of 1.00823 set by the central bank before the session started.

It also finished at a record high of 7.8313 versus the US dollar.

"We firmly believe that the Hong Kong dollar will stay pegged to the US dollar while the yuan should continue to appreciate," Tao said. "De-pegging would do little good to Hong Kong," which has lower operating costs than New York and London.

Tao noted that Hong Kong's basic law, which stipulates the exchange-rate regime, cannot be changed overnight to revalue the currency, and there is no political incentive to push for such move.

Abandoning the dollar peg would also have limited effects on trade as Hong Kong produces few manufactured goods, the report said.

"Given its city economy status, with a heavy weighting in the finance and property sectors, monetary stability is paramount," Tao said. "Hong Kong's strong link with Chinese mainland is through its geological and cultural ties, not based on costs."

Credit Suisse expects the yuan to trade at the parity level with the Hong Kong dollar by year end and to rise between 5 percent and 8 percent against the greenback in 2007.

Stephen Green, a senior economist at Standard Chartered Bank, shared the view with Tao.

"The Hong Kong dollar is very well served by its peg to the US dollar," said Green, "Maybe after five or 10 years when the two economies are more similar, the authorities will have good reasons to rethink the Hong Kong dollar peg, but until then, no change