Dec. 14 (Bloomberg) -- The yuan headed for its biggest weekly advance in more than a month as Chinese officials signaled they're willing to allow faster appreciation to cool economic growth.

U.S. Treasury Secretary Henry Paulson said this week during his fifth visit to China that the Asian nation ``recognizes'' the need for greater currency flexibility. Central bank Governor Zhou Xiaochuan said China will use exchange-rate policy to prevent overheating after reports showed inflation at an 11-year high, a widening trade surplus and rising retail sales.

``China is accelerating the pace of currency gains for their own reasons and it's encouraging,'' said Patrick Bennett, a foreign-exchange strategist at Societe Generale SA in Hong Kong. ``The currency needs to take more of a tightening role.''

The yuan rose 0.43 percent this week to 7.3715 per dollar as of the 5:30 p.m. close in Shanghai, compared with 7.3692 yesterday and 7.4030 a week ago, according to the China Foreign Exchange Trade System. The currency touched 7.3640 yesterday, the strongest since a link to the dollar was scrapped in July 2005.

Stocks in Hong Kong and China fell for a third day on speculation the People's Bank of China will boost interest rates. The central bank increased its lending and deposit rates five times this year and raised the amount of cash banks must set aside 10 times.

`A Drastic Measure'

``A rate hike would be a drastic measure but it's quite reasonable for them to increase again,'' said Carlos Cheung, chief currency dealer at Bank of East Asia Ltd. in Hong Kong. ``I would not be surprised if they hiked today.''

China's consumer prices increased 6.9 percent in November, the statistics bureau said Dec. 11, while the trade surplus rose 15 percent to $26.3 billion, the third-highest monthly total, the custom's bureau said the same day. Gross domestic product expanded 11.5 percent in the third quarter, the fastest pace of the world's 20 biggest economies.

China has attempted to appease U.S. and European officials by letting its currency gain at a faster rate before and during visits by dignitaries. The nation has come under pressure to increase the pace of the yuan's appreciation to address global imbalances in trade that some governments blame on an undervalued currency.

The yuan climbed 0.84 percent last month, the biggest gain since the end of the dollar peg, when European Central Bank President Jean-Claude Trichet visited the country to press for greater flexibility. China widened the yuan's daily trading range on May 18 to 0.5 percent from 0.3 percent, days before Paulson met with Chinese officials in Washington.

`U.S. Media Hype'

China this week fought back on trade issues, with Acting Commerce Minister Chen Deming saying the dollar's decline is a bigger concern than the yuan's gain and Vice Premier Wu Yi criticized ``U.S. media hype about China's exports'' for damaging China's national image.

Forward contracts in the yuan show traders are betting on a 9.1 percent appreciation in the currency to 6.7547 in the next 12 months. The median estimate of 29 analysts surveyed by Bloomberg News is for a 6.90 rate by the end of 2008.

China's finance ministry sold 26.35 billion yuan ($3.6 billion) of 10-year notes today, completing this year's sales of so-called special bonds to raise money for the country's sovereign wealth fund.

The securities were sold at a yield of 4.41 percent, according to traders at China Construction Bank Corp. and the Agricultural Bank of China, primary dealers obliged to bid at government auctions. The coupon compares with the 4.49 percent yield for similar-maturity debt sold last month.

Government bonds were little changed, with the yield on the 4.55 percent note maturing in September 2022 holding at 4.72 percent. The price was at 98.194 per 100 yuan face amount from 98.198 late yesterday.

To contact the reporter on this story: Aaron Pan in Hong Kong at Apan8@bloomberg.net.

Last Updated: December 14, 2007 05:24 EST