The yuan rose and ended the year with a seven-percent advance, as strategists raised their forecasts after China's central bank signaled faster gains are needed to cool the economy.

The currency advanced twice as fast as in 2006 as policy makers sought to curb inflation and cut a record trade surplus that has strained ties with the United States and Europe. It gained 0.9 percent this week, prompting ING Bank NV, Deutsche Bank AG and Lehman Brothers Holdings Inc to adopt more aggressive yuan predictions, Bloomberg News surveys show.

"The government will choose to use appreciation of the yuan to solve the inflation problem," said Shen Minggao, Citigroup's Beijing-based economist. "The appreciation pace may even quicken next year."

The yuan rose 0.18 percent to 7.3041 per US dollar as of the 5:30pm close in Shanghai, according to the China Foreign Exchange Trade System. The currency's gain this week was the biggest since the end of a dollar peg in July 2005. The yuan touched 7.3015 per US dollar, the strongest since the end of the link. Citigroup forecasts the yuan will rise 7.6 percent next year to 6.79.

The median estimate of 28 analysts surveyed by Bloomberg is for a rate of 6.88 by the end of 2008. Forward contracts show traders are betting on an 8.5-percent advance in the yuan to 6.7315 in the next 12 months.

China's trade surplus, which surged 52 percent in the 11 months through November to US$238.1 billion, has driven foreign-exchange reserves to a record US$1.46 trillion, making it difficult for the government to slow growth and tame asset-price inflation.

Gains in the yuan will help "lower import costs and curb low-end exports," Yao Jingyuan, chief economist of the National Bureau of Statistics, told a seminar in Beijing on Thursday. The central bank said in a December 21 statement it plans "forceful measures" to limit money supply, including a more flexible exchange rate. China allows the yuan to fluctuate 0.5 percent on either side of a daily rate set by the central bank.

The US trade deficit with China is still set to exceed last year's record of US$232.5 billion.

(Shanghai Daily December 29, 2007)