BEIJING (Bloomberg) — The yuan held near its highest close since the end of a dollar link as China may allow faster currency gains to prevent its record trade surplus from further increasing foreign-exchange reserves.China can let the yuan strengthen gradually, Securities Times yesterday cited Tang Xu, head of research at the central bank, as saying. The nation’s trade surplus may swell by almost two thirds to a record $168 billion this year, the government indicated on December 7. China’s reserves, at over $1 trillion, are the largest in the world.

“The appreciation pressure from real inflows will continue,” said Craig Chan, an Asian-currency strategist at Lehman Brothers Holdings Inc. in Hong Kong. “The massive trade surplus is creating a massive amount of excess dollars onshore. That’s going to continue until next year at least.”

The yuan traded at 7.8170 against the dollar as of 10.02 a.m. in Shanghai, according to data compiled by Bloomberg. The currency has risen 5.8 percent since the decade-old fixed exchange rate of 8.3 to the dollar was abandoned in July 2005. It may climb to 7.5 by the end of next year, Chan said.

A stronger yuan increases export prices and lowers import costs, helping to rebalance the world’s lopsided trade that the US claims is a result of China’s undervalued currency. Chinese Vice Premier Wu Yi said on December 14 that the nation must move gradually on reforms, pledging to spur imports and take other measures toward a free-market economy.

Paulson and Bernanke

US Treasury Secretary Henry Paulson said on December 15 after talks with Chinese officials in Beijing that the two countries pledged to take measures to narrow the global trade imbalances. Federal Reserve Chairman Ben S. Bernanke said in China’s capital the same day that an “undervalued” yuan was an “effective subsidy” for exports.

The US trade deficit with the mainland widened to a record $24.4 billion in October, from $23 billion the previous month.

China’s currency yesterday ended trading at 7.8152 after the US Treasury declined to brand China a manipulator of foreign-exchange markets and acknowledged the Asian nation is working toward greater yuan flexibility.

The report released on December 19 said China’s effort to boost a freer yuan was “considerably less than is needed.”

“It eases the political pressure,” Lehman’s Chan said. “China is moving at its own pace, not the pace that the US wants.”