Nov. 23 (Bloomberg) -- China's yuan strengthened beyond 7.4 to the dollar for the first time since a fixed exchange rate was scrapped in 2005, as the central bank allowed faster gains before a visit by European officials next week.

The currency's appreciation ``should accelerate,'' European Central Bank President Jean-Claude Trichet, who arrives in Beijing on Nov. 27 for two days of talks, said yesterday. Xie Fuzhan, a member of the People's Bank of China's monetary policy committee, said increased yuan flexibility is ``essential'' to make China's economy more stable.

While the yuan has risen about 5 percent against the dollar this year, it has weakened by almost 7 percent versus the euro, raising the cost of European goods. Growth in China's exports to Europe and the U.S. have flooded its economy with cash, helping push the inflation rate to a decade high.

The Europeans will ``highlight the issues they see driving such a huge trade deficit,'' said Sean Callow, senior currency strategist at Westpac Banking Corp. in Singapore. ``There is validity to lots of their concerns, which ultimately add to the argument for sustained and substantial yuan appreciation.''

The currency advanced 0.11 percent to 7.4060 against the dollar as of the 5:30 p.m. close of trade in Shanghai, from 7.4257 a week ago, according to the China Foreign Exchange Trade System. The currency rose as high as 7.3912, the strongest since the dollar link was ended.

The median forecast of 24 analysts and strategists surveyed by Bloomberg News was for the currency to trade at 7.30 by the end of the first quarter. Westpac predicts 7.36.

Central Bank Signal

Forwards contracts show traders are the most bullish on yuan gains since the end of the dollar link, betting the currency will reach 6.7790 in 12 months, a gain of 9.2 percent from the current spot rate. The U.S. dollar reached a record low versus the euro today.

The central bank signaled it wanted the yuan to gain today by setting the reference rate for the day's trading at 7.3992 from the close of 7.4145 yesterday. The yuan is not allowed to fluctuate more than 0.5 percent from the daily rate.

``China's government may use a higher reference rate to guide the market to let the yuan gain faster,'' said Wang Tao, head of economics and strategy for Greater China at Bank of America Corp. in Beijing. ``It's easier to do so when the dollar weakens versus major currencies.''

Trichet will be accompanied by Luxembourg Prime Minister Jean-Claude Juncker and European Union Commissioner Joaquin Almunia and will meet central bank officials. French President Nicolas Sarkozy will make his first state visit to China on Nov. 25 and plans to discuss the yuan. U.S. Treasury Secretary Henry Paulson will travel to China next month.

Dollar Declines

European and U.S. officials have urged China to allow faster appreciation in the yuan to reduce global imbalances in trade that are threatening manufacturing jobs. They say the Asian nation keeps the currency undervalued to boost exports.

China tempers advances in the currency by buying dollars to protect exporters, limiting yuan gains so far this quarter to 1.4 percent compared with 4.5 percent in the Philippine peso and 2.8 percent in the Singapore dollar.

A report this month showed China's October trade surplus rose 13.5 percent from a year earlier to a record $27.05 billion. Exports climbed 22 percent to $107.7 billion and imports increased 26 percent to $80.7 billion.

Central bank Governor Zhou Xiaochuan this week said the nation will consider expanding the yuan's 0.5 percent daily trading limit and gradually allow the currency to move more freely.

China GDP

China's economy expanded 11.5 percent in the third quarter from a year earlier, fueling expectations the central bank will continue raising borrowing costs to curb inflation. The People's Bank of China has raised interest rates five times this year and the banking watchdog has asked commercial lenders to restrict loan growth to 15 percent this year.

Central bank bills maturing in less than one year rose on speculation banks are buying such short-term securities so that cash can be available at the start of next year. Zero-coupon bills sold by the central bank at a discounted price due in December climbed 0.02 to 97.21 per 100 yuan face amount, according to the China Interbank Bond Market.

The finance ministry sold 32.5 billion yuan ($4.3 billion) of seven-year bonds today at a coupon of 4.35 percent, 0.45 percentage point up from the 3.9 percent coupon on the similar- maturity debt sale in August. The auction drew bids of 51 billion yuan, the ministry said.

``Market demand for medium- and long-term debt has been stable,'' said Zhang Lan, a fixed-income analyst with Bank of Nanjing Co.

To contact the reporters on this story: Belinda Cao in Beijing at lcao4@bloomberg.net; Aaron Pan in Hong Kong at Apan8@bloomberg.net.

Last Updated: November 23, 2007 05:13 EST