Oct. 29 (Bloomberg) -- The yuan rose the most in two years after China's central bank signaled it will allow the currency to appreciate faster to help narrow a record trade surplus and slow inflation.

The currency climbed 0.3 percent after the People's Bank of China set the highest daily reference rate since it ended a fixed link to the dollar in July 2005. Deputy Governor Liu Shiyu said on Oct. 26 that foreign exchange markets have ``a role to play in correcting'' trade imbalances, reacting to calls for more rapid gains by the Group of Seven nations.

``Strong credit growth, investment and inflationary pressures are still apparent,'' said Craig Chan, a currency strategist in Singapore at Lehman Brothers Asia Ltd. ``Authorities will use the exchange rate in its monetary tightening bias.''

The yuan rose to 7.4745 versus the dollar at the 5:30 p.m. close in Shanghai, the biggest gain since the peg ended in July 2005, according to data compiled by Bloomberg. It will strengthen to 7.4 by the end of the year, according to the median forecast of 28 economists.

The yuan, a unit of China's currency, the renminbi, fluctuates within a 0.5 percent range against the dollar from a level set daily by the central bank. The currency was little changed compared with the record reference rate today.

``They need to have the renminbi appreciate more quickly so it reflects economic fundamentals,'' said U.S. Treasury Secretary Henry Paulson at a conference in Mumbai today. He'll visit Beijing in December for the third round of the Strategic Economic Dialogue talks.

Weakening Dollar

The dollar is down 8 percent so far this year on a trade- weighted basis against six currencies including the euro and the yen. Over the same period, the U.S. currency is down 4.2 percent against China's yuan, while the euro is up 4.6 percent.

China's record $185.7 billion trade surplus in the first nine months has flooded banks with cash, and the economy grew at an 11.9 percent annual pace in the second quarter. The central bank has raised interest rates five times this year after inflation accelerated to a 10-year high.

China Life Insurance Co. has surpassed AT&T Inc. in market value, giving China more of the world's 10 largest companies than the U.S. for the first time. Five of the 10 biggest companies by market capitalization are now Chinese, compared with three that are located in America, after China's benchmark stock index almost tripled this year.

China's Lending Rate

China will raise the benchmark one-year lending rate to 7.56 percent from 7.29 percent this year, according to 16 of 17 economists surveyed by Bloomberg News last week. The deposit rate will likely rise to 4.14 percent from 3.87 percent.

Inflation cooled in September to 6.2 percent from an almost 11-year high of 6.5 percent in the previous month after food- price gains slowed.

China's economy will see ``big growth, and the Chinese authorities will continue to allow the yuan to appreciate,'' said Thio Chin Loo, a currency strategist in Singapore at BNP Paribas. The currency will rise as high as 7.40 versus the dollar by the end of 2007, Thio said.

The G-7 countries called for ``an accelerated appreciation'' in a communique following an Oct. 19 meeting in Washington. Pressure for yuan gains also increased after the Fed cut borrowing costs and the dollar sank to an all-time low against currencies of six U.S. trading partners.

Dollar Index

The New York Board of Trade's Dollar Index measuring its value against the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc, fell to 76.85, the lowest since the index started in March 1973.

China's yuan has gained more than 10 percent since the central bank started managing the currency against a basket of currencies including the euro, yen, South Korea's won and the British pound.

Chinese bonds fell on speculation the central bank will raise borrowing costs.

The yield on the 10-year bond rose 3 basis points, or 0.03 percentage point, to 4.49 percent, according to the China Interbank bond market. The price of the 4.46 percent securities due in September 2017 fell 0.22, or 2.2 yuan per 100 yuan face amount, to 99.78.

``Demand for bonds is weak as concerns linger that interest rates will rise again,'' said Li Haijun, a fixed-income trader in the northeastern Chinese city of Jinzhou at Jinzhou City Commercial Bank.

To contact the reporters on this story: Kim Kyoungwha in Seoul at kkim19@bloomberg.net; Jian-Guo Jianguo in Shanghai at jjiang@bloomberg.net.

Last Updated: October 29, 2007 12:53 EDT