YESTERDAY'S sharp response to the adjustments in the yuan was either an over-reaction to an event which many people have misunderstood, or a final understanding of a real situation which many have been ignoring. The action taken by the Chinese authorities earlier in the week was basically an unsticking of the swaps markets - where enterprises with foreign investments can trade currencies. The resulting depreciation of the currency was steep, but the yuan's valueon the swaps market and black market has been floating steadily down for a long time. Even the official rate has been devalued from time to time. The reaction here was partly based on fears that repatriated profits from China would tumble in line with the fall in the mainland currency. It may also have been a recognition that for Chinese authorities to have taken such action, the economic situation must be as bleak as many of the pessimists have been warning for months. Judging the effect on Hongkong companies is not simple. Analysts are already going through the likely victims, or beneficiaries, on a case-by-case basis, and the true picture will be much less grim than share prices suggested. Much more important in the long term is the move by the mainland towards a more market-based system of setting exchange rates. The swaps market was widely believed to have been artificially controlled, but if it reacts to supply and demand a valuable step has been taken towards an orderly, market-driven foreign exchange market in China. This will give Beijing an important economic weapon - and one which could be used to defend the economy against the back-lash of the present over-heating. A greater flexibility will not mean more volatility because adjustments will be made as required, not when the pressures have made them inevitable. This is much more positive for the Chinese economy and, therefore, Hongkong.