They noted that prices of imported mainland food will continue to shoot up and low-income families may be forced give up fresh meat, vegetables and fruit for lower-quality frozen foods.

"The yuan is strengthening and the US dollar is weakening. The Hong Kong economy is caught in between these two currencies," City University associate professor of economics and finance Li Kui-wai told The Standard.

The yuan rose as high as 7.0013 against the greenback yesterday before ending trading at 7.0015 on the over-the-counter market.

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It is expected to breach the key psychological level of 7.0000 in the coming days.

Citi economist Joe Lo said yuan appreciation will boost the cost of imported mainland goods in Hong Kong and exacerbate inflation.

"If the pace of renminbi appreciation is not too rapid, Hong Kong can absorb the increases in price without too much difficulty," Lo said.

"But in the past six months ... the prices of some consumer goods in Hong Kong have increased more sharply."

Also, the supply sources for fresh fruit, vegetables, pork and beef have been limited in recent years, so Hong Kong is heavily dependent on China for these imports, he said.

"We have no other alternatives for importing these foods," Lo said.

Li said the yuan's rapid rise is a "warning sign" Hong Kong's economic growth could be dampened this year.

"We don't expect to have too rosy a picture this time," Li said, adding it is possible that rising inflation triggered by the yuan's faster appreciation could lead to a recession in Hong Kong.

Nomura economist Tomo Kinoshita said the SAR will see downward pressure on its economic growth this year. In the worst-case scenario, the city's GDP growth rate could be as low as 3.9 percent, down from 6.3 percent in 2007, Kinoshita said.

Nancy Chan Ha-fong, deputy general manager of Bank of Communications' (3328) Hong Kong branch, said that customers have been showing increasing interest in yuan deposits since the fourth quarter of last year.