Nov. 13 (Bloomberg) -- The yuan declined the most since the end of its dollar link in July 2005, after the nation's top currency regulator said China should curb its reliance on overseas funds and improve the quality of inflows.

The yuan has risen 5.1 percent this year as surging exports boosted the trade surplus to a record $27.05 billion in October, the customs bureau said yesterday. The currency also fell today on speculation the central bank will seek to slow its gains to discourage speculators from betting on a further advance.

``The central bank needs to set the yuan's rate lower and use two-way fluctuations to break expectations'' of yuan gains, said Liu Hantao, a currency trader with China Construction Bank Corp. in Beijing. ``The yuan's continuous rise in recent weeks can easily lead speculators to bet on further gains and encourage more inflows of hot money.''

The yuan fell 0.29 percent to 7.4335 per dollar as of the 5:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. Currencies that China uses to manage the yuan against, including the Japanese yen and South Korean won, also fell today.

China should reduce its reliance on overseas funds and will relax restrictions on outward investments in an ``orderly'' manner, Hu Xiaolian, head of the State Administration of Foreign Exchange. She reiterated a pledge to improve the yuan's exchange rate mechanism in comments in a statement posted yesterday on the People's Bank of China's Web site.

Foreign direct investment in the nation rose 11.2 percent in the first 10 months of this year to $54 billion, the Ministry of Commerce said yesterday.

European Finance Ministers

European finance ministers pressed China to let its currency strengthen at a meeting in Brussels yesterday, as they complained Europe's economy is shouldering a disproportionate share of the impact of the drop in the U.S. dollar.

``China has accelerated the yuan's gain in the past few weeks and will appreciate the yuan at its own pace,'' said Chris Leung, senior economist at DBS Bank Ltd. in Hong Kong. ``International pressures won't have much impact on China's currency rate.'' Leung forecast the yuan will gain to 7.35 per dollar by the year-end and 6.98 by end of 2008.

The yield on one-year central bank bills issued today rose from last week's sale on speculation the central bank will raise interest rates to ease inflation. China's consumer prices increased 6.5 percent from a year earlier, matching the decade- high in August, the nation's statistics bureau said today.

Rising Yields

The People's Bank of China sold 3.5 billion yuan of one- year notes at a yield of 3.94 percent today, 0.15 percentage point up from the similar-maturity sale a week ago. The yield on the one-year bills auctioned Oct. 31 was 3.61 percent.

``Rising yields for the central bank bills sales in recent weeks reflect investors' speculation for another rate increase,'' said Yang Hui, a fixed-income analyst with Citic Securities Co. in Beijing. ``The central bank also wants to see a higher short-term interest rate to increase funding costs.''

The central bank has raised the benchmark deposit and lending rates five times this year to help cool an economy that expanded 11.5 percent in the third quarter. The one-year deposit rate is 3.87 percent and the one-year lending rate is 7.29 percent.

To contact the reporter on this story: Belinda Cao in Beijing at lcao4@bloomberg.net.

Last Updated: November 13, 2007 05:19 EST