Feb. 20 (Bloomberg) -- The yuan rose for a fifth day after China's central bank pledged new policies and increased currency flexibility to curb the fastest inflation in 11 years.

The currency rose to the highest since a link to the U.S. dollar ended in July 2005 after the People's Bank of China said in a five-year plan released yesterday that it will ``innovate'' to address problems including growth in money supply. Global commodity prices surged to a record yesterday, as oil jumped above $100 a barrel and copper rallied.

``The constant message is the need to mop up excess liquidity,'' said Dwyfor Evans, a strategist with State Street Global Markets in Hong Kong. ``Commodity prices are also a threat so they will need currency strength as an offset.''

The yuan advanced 0.2 percent to 7.1436 per dollar as of the 5:30 p.m. close in Shanghai, from 7.1580 yesterday, according to China Foreign Exchange Trade System. The currency gained 2.2 percent this year after rising about 7 percent in 2007.

Consumer prices rose 7.1 percent from a year ago in January, the statistics bureau said yesterday. Accelerating inflation adds to evidence the world's fastest-growing major economy is at risk of overheating. The nation's trade surplus rose more than forecast in January and money supply grew at the quickest pace in 20 months.

Import Prices

China is stepping up the pace of yuan appreciation to bring down the cost of imports and help curb inflation, driven higher by the worst snowstorms in five decades. It raised interest rates six times in 2007 and has boosted the proportion of deposits that banks must hold as reserves to 15 percent.

``We will further improve monetary policy controls, continue to use quantitative measures, widen usage of price- related policy tools and increase innovation in monetary policy measures,'' the central bank said in the report, without elaborating.

China's currency will rally to 6.70 per dollar by the end of 2008, according to the median estimate of 26 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on a 8.9 percent advance to 6.56 in the next 12 months.

China will explore more channels for investing the world's biggest foreign-currency reserves, aiming for ``higher returns,'' the report said. The nation set up China Investment Corp., a $200 billion sovereign wealth fund, in September.

Bonds Advance

Government bonds rose after China Development Bank, one of three banks lending on behalf of the government, sold 40 billion yuan ($5.6 billion) of debt at yields lower than investors' expectation.

The bank sold 20 billion yuan in 7-year bonds at a yield of 4.83 percent. The same amount was sold of 10-year bonds with a yield of 4.95 percent, according to statements posted on the Chinabond Web site, which is run by the nation's biggest clearing house. Both auctions drew bids of more than 1.7 times the amount offered.

``Yields were lower than our expectations previously, dragging down yields on the secondary market,'' said Qi Pengzhou, a bond analyst with Bank of China Trading Center in Shanghai. ``We had expected the 10-year bonds would yield 5 percent.''

The yield on the treasury note due in November 2014 declined 3 basis points to 4 percent, according to the China Interbank Bond Market. The price of the 4.35 percent security climbed 0.2 per 100 yuan face amount to 102.05.

To contact the reporters on this story: Kim Kyoungwha in Beijing at kkim19@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.

Last Updated: February 20, 2008 05:28 EST