IN the face of soaring inflation, China needs a stable exchange rate, not a fluctuating one, say Hongkong economists. They said the removal of the exchange rate cap at swap centres three months after its introduction might have confused the country's financial system, and they warned against repeated changes of exchange rate policy. They noted fundamental problems hindering the development of the financial market. The most notable was the existence of three exchange rates - official, swap centre and black market. A unification of the three rates has long been the country's goal, although it appears unlikely in the short to medium term. Benjamin Chan Sau-san, head of economic research at Bank of East Asia, said it had always been China's aim to achieve a market-driven exchange rate. But he had reservations about the practicality of this ambition, given the inflation threat. ''A stable currency is more suitable for the present economic conditions in China.'' Salomon Brothers chief regional economist Andrew Freris said the move showed China to be willing to accept greater volatility as the price for more flexibility. He said: ''This will in fact mean less volatility in the business cycle. Without some sort of action, there would have been the mother of all recessions in China. Mr Freris said China was witnessing neither devaluation nor a float. ''The swap market has been floating since 1989. Even the official government fixed rate has changed significantly since 1982. It has fallen a compounded 4.7 per cent a year since then.'' He said only a third of deals were conducted through the swap market: the remainder went through the official and black markets. At the country's biggest swap centre in Shanghai, the yuan dropped slightly yesterday to close at 10.23 to the US dollar from 10.17 on Tuesday. There was no trade in the Shanghai swap centre on Wednesday. The swap rate compares with the official rate of 5.73 yesterday. Mr Chan said China's state treasury had foreign exchange reserves of US$25.2 billion in the second quarter of last year. Combined with the Bank of China's foreign exchange reserves of $19.8 billion, the total at that time was $45 billion. Hongkong's Director-General of Trade, Tony Miller, said yesterday that he hoped China's decision to remove controls on the yuan's price at swap centres would prevent distortion of prices and ease China's entry to the General Agreement on Tariffs and Trade.