The forged notes were believed to have been produced by a fraud syndicate in Taiwan, which was busted in October with the seizure of 100 million yuan in fake notes. The report quoted police sources as saying the syndicate had been active for some time, and it was believed a large number of fake yuan notes had been smuggled to the mainland.

Up to nine provinces had reported discoveries of the fakes, it said, and some were also believed to be circulating in Hong Kong and Macau. The report said the fakes had high-quality watermarks and colour, and were difficult to identify by sight or touch.

Ngau Kee Money Changer director Edwin Shiu Man-chak said he had learned about the problem yesterday, but had not seen any of the notes. 'It is too early to say whether we will refuse yuan notes with those particular serial numbers as we have no idea of their quality yet,' he said, noting that they had measures in place to identify genuine notes.

Mr Shiu said his staff would identify notes by touch and they would have to pass two sets of counters before they were given to customers. 'As yuan become more popular, it is inevitable to have more fake notes circulating,' he said.

Police figures revealed that a total of 7,975 fake yuan notes were seized in the first nine months of last year, a 21 per cent surge from 6,610 in the same period of 2007.

A spokesman said the fakes were mostly discovered by banks, and their quality ranged from normal to poor. They are believed to have originated on the mainland, he said.

Last Sunday, two mainland men were arrested when they attempted to make a purchase in a Tsim Sha Tsui shop using fake yuan notes. Police seized 13 counterfeited 100 yuan notes, which were reportedly of very high quality and with similar serial numbers.

According to the website of the People's Bank of China, the public is advised to keep an eye out for the unique features - security fibres, security thread and watermark - of genuine banknotes.