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HONG KONG, May 21 (Reuters) - Hong Kong's central bank chief Joseph Yam on Thursday said he did not foresee a recovery in the global economy in the short term and warned of possible risks for investors in Hong Kong as recent stock market gains were out of step with economic fundamentals.
Yam, who is to retire as head of the Hong Kong Monetary Authority (HKMA) on Oct. 1, also reaffirmed that there would be no change in monetary policy as there was no reason to change the territory's currency peg with the U.S. dollar, despite growing economic links between Hong Kong and mainland China.
The territory's stock market has rallied in recent weeks on signs of a recovery in China's economy and hopes that the worst is over for the global economy, but Yam said fund flows could reverse.
"Market inflows and outflows might be volatile," he told legislators. "In the short term, the financial market may perform out of step with the economy but ... if the market takes a reverse turn there could be a slump and there could risks."
The decline in the global economy had eased but was not over, he said.
"I don't think the global economy will recover soon," he said, during a quarterly briefing on the HKMA's activities to the Legislative Council.
On the currency matters, Yam said there was no reason to
change the Hong Kong dollar's
"I see no reason to change the monetary system in the near term," he said.
"Of course it's best if (our currency) can be pegged to the currency of our most important trading partner," Yam said, adding that Hong Kong's business cycle was still much more closely tied to the U.S. business cycle and the Chinese yuan was not freely convertible. (Reporting by Susan Fenton, Editing by Jacqueline Wong and Chris Lewis)