Jan. 4 (Bloomberg) -- China's yuan advanced for a fourth week as central bank policy makers signaled they will allow faster gains in the currency to cool the economy.

The yuan traded near the strongest since its link to the dollar was scrapped in July 2005 as a local newspaper quoted central bank Vice Governor Su Ning as saying the flexibility of the exchange rate will increase this year to help curb inflation.

``The economic backdrop is arguing for faster yuan appreciation,'' said Craig Chan, a currency strategist at Lehman Brothers Holdings Inc. in Singapore. ``The rhetoric coming out from the Chinese shows they want more flexibility.''

The yuan gained 0.43 percent this week to 7.2730 per dollar as of the 5:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The currency yesterday touched 7.2721, the strongest since the peg was abandoned.

The yuan strengthened about 7 percent last year as China sought to temper inflation from the fastest in 11 years and to reduce a record trade surplus.

The currency took two months to advance from 7.6 to 7.5 per dollar in 2007 and just over a month to gain from 7.5 to 7.4. The yuan strengthened beyond 7.3 this week for the first time since the end of the peg.

Yuan Forecasts

The central bank will focus on the ``real effective exchange rate'' to give the yuan a bigger role in international payments, balancing economic growth and curbing rising prices, Vice Governor Su said at a People's Bank of China meeting in Beijing yesterday, the 21st Century Business Herald reported today.

Central bank Governor Zhou Xiaochuan on Dec. 29 pledged to further curb liquidity and improve the exchange-rate mechanism.

The central bank has been allowing the currency to appreciate faster to appease U.S. and European officials who blame a weak yuan for global trade imbalances.

The yuan will rise to 6.87 per dollar by the end of 2008, according to the median estimate of 32 analysts surveyed by Bloomberg News.

Standard Chartered Plc today raised its forecasts for the yuan, estimating the currency will advance to 6.64 per dollar by year-end, from a previous forecast of 6.84. Forward contracts show traders are betting on an 8.8 percent appreciation to 6.6825 in the next 12 months.

Bonds Rise

Short-term government bonds gained on speculation money returned to the market after initial public offerings of shares.

``Funds are still loose after two small IPOs started yesterday so the yield on short-term bills even declined a little,'' said Yang Yongguang, a fixed-income analyst at Guo Hai Securities Co. in Shenzhen, southern China.

Zhejiang Hailiang Co. Ltd. and Dalian Huarui Heavy Industry Steel Casting Co. Ltd. started the sale of a combined 1.2 billion yuan ($165 million) of shares yesterday via Internet subscriptions, according to data compiled by Bloomberg.

The benchmark interbank seven-day repo fixing fell 8 basis points to 2.85 percent, according to the National Interbank Funding Center. Demand from funds to subscribe for the stock sales yesterday pushed the rate up 8 basis points. A basis point is 0.01 percentage point.

The yield on central bank bills due in March declined 4 basis points to 3.36 percent, according to the China Interbank Bond Market. The price of the security rose to 99.17 per 100 yuan face amount from 99.16.

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

Last Updated: January 4, 2008 04:54 EST