The Straits Exchange Foundation, the semiofficial Taiwanese group that handles dealings with China, said on Saturday its chairman, Koo Chen-fu, was preparing a response to Beijing's demand Friday for an explanation. China said it would cancel the planned autumn visit to Taiwan by its top negotiator, Wang Daohan, unless it gets a satisfactory clarification from Koo.

The government was staying tight-lipped about what Koo will tell Beijing. But if any Taiwanese can pacify the mainland leadership over Lee's new stand that Taiwan and China are two states in one country, it would be Koo, a temperedand well-respected politician who met Wang in Singapore in 1993 in a watershed formal negotiation between the sides.

Lee set off the uproar on July 9, commenting to a German radio interviewer that Beijing should deal with Taiwan on a "state-to-state basis." Lee and other officials quickly clarified that Taiwan's new stance is not a step toward formal independence and it still adheres to the goal of reunification.But Beijing was not appeased, accusing Taiwan of departing from the "one China" policy that had long underpinned the delicate relations of the two sides since they split in a civil war in 1949. China has stepped up its verbal tirade on Saturday.

The official Xinhua News Agency called Lee a "sinner in history" by attempting to split the motherland. "Lee gradually tore off his camouflage" as he tried to take advantage of the anti-China sentiment emerging in the United States, Xinhua said. Taiwanese commentators are urging the government to take care in crafting its response to China.

"Our imminentjob is to detect the bottom-lines of Washington and Beijing and balance them with our national interests before drafting this important historical document," editorialized the China Times, a major newspaper."The worst would be pushing it out in a rush and miss the last chance to avoid a showdown." Hong Kong newspapers have carried several reports of Chinese military maneuvers, pushing Taiwan's stock market into a tailspin. The blue chips opened with a loss of 4 per cent on Saturday, prompting the government to pour money into the market to stop the free fall.

The government intervention pushed the Weighted Stock Price Index back up to finish the day with a loss of just 0.6 per cent. Still, the shares are off by almost 13 per cent since they went into a dive on Tuesday.

The pro-Beijing Wen Wei Po newspaper in Hong Kong said China mobilized armed forces for sea drills Friday in the coastal city of Quanzhou in southern China. Large-scale army, navy, and air force joint drlls were also being planned along thecoast in Zhejiang province and the city of Shanghai, the report said, adding that Chinese President Jiang Zemin was to decide on the type of exercises and when they would take place.

Taiwan's Defense Ministry reiterated Saturday it had detected no unusual Chinese military maneuvers. "Beijing sees Lee's statehood claim as a formal declaration of Taiwanese independence, and will by no means accept it," said prominent political analyst Lu Ya-li. If Koo fails to modify Lee's declaration.