Dec. 12 (Bloomberg) -- The yuan rose to the highest since China ended a fixed exchange rate to the dollar in 2005 after U.S. Treasury Secretary Henry Paulson reiterated calls for faster appreciation during talks with Chinese officials.

The advance took the yuan's gain this quarter to 1.8 percent after retail sales increased the most in at least eight years, adding to speculation the central bank will keep raising interest rates to cool the economy. China must let the yuan rise faster given ``mounting inflation, growing asset bubbles and possible overheating,'' Paulson said today.

``We are getting closer to a change in policy for the yuan,'' said Magnus Prim, chief foreign-exchange strategist at Skandinaviska Enskilda Banken in Singapore. ``Moving quicker on the currency front is a win-win situation for China. This visit by Paulson might move the development a bit quicker.''

The currency rose 0.05 percent to 7.3770 per dollar as of the 5:30 p.m. close in Shanghai from 7.3805 late yesterday, according to the China Foreign Exchange Trade System. It touched 7.3670, the highest since the link to the U.S. currency was scrapped in July 2005 and completed a fourth day of gains.

People's Bank of China Governor Zhou Xiaochuan said this week that China will use exchange-rate policy to stem economic growth as inflation reached the highest in almost 11 years and the trade surplus rose to the third-biggest monthly total. The economy is expanding at the fastest pace among the world's 20 largest economies.

`Domestic Pressures'

``The domestic pressures in China have actually argued in favor of a stronger currency, as well as the international pressures,'' said Adrian Foster, director of currency sales in Beijing at Dresdner Kleinwort. ``There are certain benefits accruing to China by having a strong currency.''

Paulson, who is on his fifth visit to China since becoming Treasury Secretary, is pressing for a more rapid yuan appreciation to help offset global imbalances in trade, which U.S. and European officials blame on an undervalued currency. Export earnings have flooded the banking system with cash, making it more difficult for China to slow economic growth.

``A more flexible exchange-rate policy is especially important to China now, given these risks,'' Paulson said.

Repercussions Concern

Forward contracts in the yuan show traders are betting on a 9.2 percent gain in the currency to 6.7585 in the next 12 months. The median estimate of 29 analysts in a Bloomberg News survey is for the currency to strengthen to 6.90 by the end of 2008.

China and the U.S. should take measures to ensure the stability of their own economies and currencies, Acting Minister of Commerce Chen Deming said today.

``Excessive yuan appreciation would cause repercussions'' that would hurt the world economy, said Chen. ``The call for faster yuan appreciation to narrow the China-U.S. trade gap is irresponsible.''

The yuan climbed 0.85 percent versus the dollar in November, the biggest monthly gain since the peg, and has advanced 6 percent this year, lagging behind the Thai baht, the Philippine peso, India's rupee, Malaysia's ringgit and the Singapore dollar. China's currency has declined about 5 percent against the euro in 2007.

Chen also said today the dollar's decline is a bigger concern for China's economy than the yuan's gains. The U.S. dollar has weakened against 15 of the 16 most active currencies this year as credit-market losses tied to U.S. subprime mortgages spread. China is the second-biggest holder of Treasuries after Japan, holding about $397 billion.

``The yuan's 6 percent gain this year against the dollar fits China's economic needs,'' Chen said. ``The dollar's depreciation makes major commodities such as gold and oil more expensive, and reduces the wealth of countries and companies that hold dollar assets.''

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

Last Updated: December 12, 2007 05:18 EST