March 15 (Bloomberg) -- The yuan posted its biggest gain since China abandoned a decade-old peg to the U.S. dollar in July after Premier Wen Jiabao said the market will play a greater role in setting exchange rates.

The yuan rose for a second day after Wen said China will expand the currency market and allow for more movement in the exchange rate. It strengthened 0.12 percent to 8.0379 against the dollar as of the close of trading in Shanghai at 3:30 p.m., from 8.0473 yesterday, according to data Bloomberg compiled.

``They will allow more flexibility in the currency, especially in light of economic and political pressure from the U.S. and European Union,'' said Qing Wang, a currency strategist at Bank of America in Hong Kong. The yuan may reach 8.02 by the month's end and 7.63 by Dec. 31, Wang said.

Pressure is mounting on China to let its currency trade more freely before the U.S. Treasury's semiannual report on currency manipulation scheduled for next month. Today's advance brought the yuan's gain to 0.9 percent since the July 21 revaluation. Treasury Secretary John Snow said on March 10 that China needs to ``play by the rules'' on trade and meet its currency commitments.

Before today, the biggest daily movement since the revaluation was less than a third of the 0.3 percent band in which it is allowed to trade. Looser exchange-rate controls are allowing the yuan to move in line with other major currencies, which have risen against the dollar during the past two days.

China allowed the yuan rise 2.1 percent against the dollar in July from a fixed rate of about 8.3 against the U.S. currency.

`Trading Band'

U.S. and European Union lawmakers accuse China of keeping the currency artificially weak to spur exports. China's trade surplus tripled to a record $102 billion last year, helping to drive economic growth of 9.9 percent, the fastest among the world's major economies.

U.S. Senators Lindsey Graham and Charles Schumer, who have threatened trade sanctions on Chinese goods, said today in Washington that they plan to travel to China before deciding to bring the legislation to a vote.

The bill co-sponsored by Graham, a Republican from South Carolina, and Schumer, a Democrat from New York, would apply 27.5 percent tariffs on Chinese goods unless the country's government loosens its fixed-exchange rate regime.

The U.S. trade deficit widened to a record $68 billion in January as economic growth encouraged consumers to buy more Chinese-made goods. The nation's gap with China swelled 9.9 percent to $17.9 billion, the Commerce Department said March 10.

`More Flexibility'

``We will further improve the renminbi exchange-rate mechanism, expand the foreign-exchange market and add more flexibility to the exchange rate's trading band,'' Wen said at the close of parliament's annual meeting yesterday in Beijing.

President Hu Jintao will visit the White House next month, according to U.S. congressmen Mark Kirk and Rick Larsen.

In February, Treasury Undersecretary Tim Adams sounded out investors about the potential impact of naming China a currency manipulator, people familiar with the situation said.

Under a 1988 law, the Treasury is required to consider twice a year whether countries are pursuing exchange-rate policies ``for the purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.'' The law says the U.S. must hold talks with governments deemed to be breaking the rules.

`Own Principles'

The People's Bank of China will keep limits on gains in its currency because of concerns a sudden rally would hurt the competitiveness of industries such as textiles and clothing.

China won't bow to pressure from the U.S., Governor Zhou Xiaochuan told reporters in Beijing on March 11. The country will follow its ``own principles'' on yuan reform and current fluctuations in the exchange rate are appropriate, he said. Wen yesterday ruled out another sudden revaluation of the yuan.

``China wants the yuan to rise in a gradual manner,'' said Irene Cheung, a currency strategist in Singapore at ABN Amro NV. ``I don't expect the yuan to rise more than 0.1 percent every day.'' It may gain to 7.65 per dollar in 12 months, Cheung said.

Clothing and textile export growth will slow this year, partly because of expectations of a stronger yuan, China's top planning agency said in a statement on its Web site on March 10.

``A stronger yuan in 2006 will put a lot of pressure on the industry and force them to find ways to lower foreign-exchange risk,'' the National Development and Reform Commission said.

Exporters

Still, China is ready to allow a more flexible exchange rate after it confirmed that last year's revaluation hasn't hurt overall growth in exports or the expansion of the economy.

The central bank said on Feb. 21 that it aims to deepen reform of the foreign-exchange system since domestic companies have ``adapted'' to last year's changes. Shipments abroad helped the economy double in size in the past decade, leapfrogging the U.K. last quarter to become the world's fourth-largest.

``They can allow the yuan to strengthen as the economy can withstand it and they want to appease foreign powers,'' Thio Chin Loo, a senior currency analyst at BNP Paribas SA, said in Singapore. BNP expects the yuan to gain to 7.6 by year-end.

A stronger yuan also helps to lower the cost of imports, encouraging domestic spending on overseas goods and countering accusations that China is propping up its trade surplus.

The country's surplus in January narrowed to the lowest since July 2004 as rising incomes in the world's most populous nation fueled demand for imported goods. It fell to $2.45 billion from $9.49 billion in January, the customs bureau said on March 13. Imports jumped 30 percent, the fastest since November 2004, while exports gained 22 percent.

To contact the reporter on this story: Christina Soon in Beijing at csksoon@bloomberg.net

Last Updated: March 15, 2006 11:10 EST