Nov. 24 (Bloomberg) -- The yuan made the biggest weekly gain in two months, closing at the strongest since a peg to the dollar was scrapped, on speculation China is allowing faster appreciation before a visit by U.S. Treasury Secretary Henry Paulson.

The yuan will become more flexible and China will encourage consumers to increase purchases of imports to reduce the nation's trade surplus, central bank Vice Governor Su Ning said yesterday. Paulson is due in China next month.

``Paulson's visit is the spotlight, and we're already seeing China allow more gains ahead of it,'' said Chris Leung, a China economist at DBS Bank Ltd. in Hong Kong. ``China probably wants to create a good atmosphere before he arrives, and a stronger yuan will definitely help that.''

China's yuan climbed 0.25 percent this week to 7.8525 against the dollar as of 5:30 p.m. in Shanghai, according to the China Foreign Exchange Trade System. The currency will strengthen to 7.83 by year-end, said Leung.

The yuan has risen 3.3 percent since China revalued the currency by 2.1 percent in July 2005. On a visit to China in September, Paulson used that progress to convince U.S. policymakers including Democrat Charles Schumer to drop legislation to levy tariffs on Chinese imports unless the currency appreciated faster.

U.S. Federal Reserve Chairman Ben S. Bernanke will join Paulson on his December visit, when they will press for changes in economic policies, including the yuan, the New York Times reported yesterday, citing unidentified Treasury officials.

More Flexibility

The U.S. blames an undervalued Chinese currency for its widening trade deficit and the loss of American manufacturing jobs. China's central bank has said the nation's banking industry is ready for faster appreciation, which is needed to curb economic growth and cap the nation's foreign-exchange reserves, the world's largest. Gross domestic product grew 10.4 percent in the third quarter from a year ago.

China's trade surplus is largely caused by manufacturers building factories in China and a stronger Chinese yuan may cause them to relocate to other Asian nations, People's Bank of China Vice Governor Wu Xiaoling said in Beijing today.

China's foreign-exchange reserves have topped $1 trillion, she told a press conference. The nation's record trade surplus has boosted reserves.

The central bank, which manages the reserves, is focusing policy on withdrawing yuan from the economy after purchasing dollars, she added.

The nation should accelerate the development of the currency market to allow demand and supply to play a fundamental role in exchange rates, the State Administration of Foreign Exchange's Hu Xiaolian said, China Securities Journal reported on Nov. 20.

Surging Reserves

Reducing China's record trade surplus and surging reserves has become a ``major task'' for the government, the newspaper said.

The yuan is allowed to trade by up to 0.3 percent against the dollar either side of the so-called central parity rate. The People's Bank of China fixed the reference rate for yuan trading at 7.8526, the strongest since the fixed exchange rate was abandoned in favor of a float with reference to a basket of currencies including the Japanese yen and South Korean won.

``The PBOC will use the currency basket as a reference to promote a flexible exchange rate in a managed manner and increase the flexibility of the yuan,'' Vice Governor Su said in a speech at a Euromoney conference yesterday.

To contact the reporter on this story: Yumi Kuramitsu in Hong Kong at ykuramitsu@bloomberg.net; Jake Lee in Hong Kong jlee127@bloomberg.net

Last Updated: November 24, 2006 05:35 EST