Fears of a devaluation of the Chinese currency have haunted Asia for 18 months, and yesterday unusually strong rumours that it was at last going to happen caused stock markets across the region to take sharp falls.

But last night Chinese officials cast cold water on such speculation. "There is little possibility that the yuan will be devalued at present," said Huang Jinbao, an economist at the Bank of China, the country's main foreign exchange bank.

He dismissed a link between the devaluation of the Brazil currency and the level of the yuan in China.

"The financial crisis in Latin America will not affect China - they are not closely linked in investment and trade," he said. "There is no foundation for further currency devaluations in Asia because some countries like South Korea and Thailand have started to recover. There is a possibility of limited fluctuations in the exchange rate of the yuan, but unlike Brazil, China does not need to announce that the exchange rate will float because the exchange rate has been set through a managed floating rate since 1994." The devaluation rumours began after the China Daily's Sunday supplement, Business Weekly, appeared to signal a rethink by some Chinese analysts. It said: "As the financial market responded positively after the Brazilian government let its currency float against the US dollar, some analysts said the devaluation or floating of the renminbi would not definitely be a bad thing."

The state-run newspaper added that a devaluation or floating of the yuan "may not trigger the fresh round of currency devaluation that has been feared by most people."

Such comments in the official Chinese media are usually a reflection of official policy but a central bank spokesman said the report "was a private opinion and did not reflect the point of view of the People's Bank of China." He said the remarks "should be read in the context of the entire article and not taken separately."

Western financial analysts yesterday pointed to the comment last week by central bank governor Dai Xianglong at a central bank annual meeting that it was "absolutely essential" to keep the yuan stable.

While the possibility of a Chinese devaluation dominated financial news in Asia yesterday - and the Chinese newspaper article might be the beginning of a softening-up process - the most savvy money dealers remained unmoved; unofficial money changers in Chinese cities like Beijing and Shanghai traded as normal. Yesterday the black market rate for the dollar was 8.85 yuan, down from 9.05 yuan at the start of the year.

While a devaluation would increase Chinese industry's competitiveness against other Asian producers, the reasons not to devalue still remain strong. A devaluation of the yuan could destabilise the Hong Kong dollar because of the extensive Chinese holdings of Hong Kong banks and financial institutions, and undermine the Hong Kong dollar's peg to the US currency. The resulting run on Chinese banks as savers withdrew deposits to buy hard currency could have a catastrophic effect on confidence in both China and Hong Kong. Most Chinese officials also acknowledge that a boost in Chinese exports would, in fact, trigger a round of new devaluations in Asia, as rival export nations struggle to remain competitive. Devaluation would also mean a serious loss of face for Chinese leaders who have insisted to the world that they will not interfere in the foreseeable with the managed float system under which the yuan holds firm at around 8.28 per US dollar.

Besides, China's foreign exchange reserves remain substantial, standing at $145 billion at the end of 1998. Stock markets fell by up to 5 per cent yesterday with the Hong Kong index losing more than four points. Among regional currencies which fell in value, the Indonesian rupiah was particularly hard hit. Some analysts argued that there were other reasons for the selloff on Asian markets. "So far we haven't see any signs of economic recovery so people are getting a bit nervous; all we have seen are interest rate falls and stock market rallies," Ms Irene Cheong, economist at CIBC in Singapore, told Reuters.