(Bloomberg, Nov 29, 2006) The yuan rose to the highest since China ended its decade-old link to the dollar after U.S. Treasury Secretary Henry Paulson said gains will help resolve ``tension'' in the trade relationship.

Some U.S. officials have blamed the undervalued yuan, which boosts Chinese exports, for the loss of American manufacturing jobs and their widening trade deficit. China's government may allow faster moves in the currency before Paulson's visit next month to prevent further criticism from the U.S., said David Mann, a foreign-exchange strategist at Standard Chartered Plc.

``We're not surprised to see some pickup in appreciation as we approach the visit,'' Hong Kong-based Mann said. ``We would expect to see more of those comments in the coming few weeks.'' A stronger yuan ``will help with resolving the imbalances.''

The yuan gained 0.1 percent to 7.8358 against the dollar as of 3:30 p.m. in Shanghai, the strongest since the end of the fixed exchange-rate in July 2005, according to data compiled by Bloomberg. The currency may strengthen to 7.80 by year-end, Mann said.

A rising yuan helps to slow exports and prevent China's record trade surplus from pushing up the country's foreign- exchange reserves. The central bank buys dollars to maintain the value of the Chinese currency.

Greater Flexibility

China's trade surplus soared to a highest-ever $23.8 billion in October, driving reserves to $1 trillion, the most for a single nation. The U.S. trade deficit with China widened to a record $23 billion in September, from $22 billion the previous month.

``There has been a fair amount of tension in the economic relationship,'' Paulson said yesterday in answering questions at a conference in London sponsored by the Confederation of British Industry. ``For this to be successful,'' issues such as ``greater currency flexibility'' must be addressed, he said.

China won't allow faster gains in the yuan than those seen this month because it needs to create factory jobs for rural laborers, said Donald Straszheim, vice chairman of Roth Capital Partners LLC.

``A persistent, gradual, rather than precipitous, strengthening in the yuan is most likely,'' Straszheim, vice chairman of Roth Capital, said today in an interview. ``China wants to protect jobs for its migrant workers.''

Quicker yuan appreciation may slow exports, which made up 35 percent of the economy last year, and help put factory laborers out of work.

`Undervalued' Currency

The yuan is ``undervalued'' and the currency markets will find its ``appropriate value,'' said Li Yang, a former member of the Chinese central bank's monetary policy committee.

The government should also widen the range of the 0.3 percent daily trading band in which the yuan is allowed to move ``before changing the management of the country's currency,'' Li, an economist at the state-run China Academy of Social Sciences, said today.

Paulson and Federal Reserve Chairman Ben S. Bernanke will meet with Chinese officials on Dec. 14 and Dec. 15 in Beijing. The yuan had its largest monthly gain in September, when Paulson held talks in Beijing with President Hu Jintao and Premier Wen Jiabao.

``Probably all the way through to the visit and a few days after, we can see continued yuan strength,'' Standard Chartered's Mann said.

Source:Bloomberg