it was said______he was translating the book into Chinese.

that
that 引导主语从句, 因为he was translating the book into Chinese这个从句结构,意义完整, 故用that
It （形式主语）was said （谓语）that he was translating the book into Chinese（主语从句）
据说,他在把那本书翻译成汉语

等于：
He was said to betranslating the book into Chinese


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