Gains in the yuan would increase export prices and lower import costs, reducing China's record trade surplus that has flooded the economy with cash. US lawmakers claim the yuan is undervalued to the detriment of US exporters. The government increased the reserve requirement for banks Thursday to drain excess funds and curb investment.

"China still wants a lower dollar- yuan," said Irene Cheung, an economist at ABN Amro Bank in Singapore. "The trade surplus is of course an issue and if there's any reason, the trade gap is partly due to the yuan being undervalued."

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The currency rose 0.11 percent to 7.7243 against the dollar at the close in Shanghai. It has gained 7.2 percent since the end of the fixed exchange rate on July 21, 2005.

Excess money in China's banking system is making it difficult for the government to cool economic growth that is the fastest among major economies ahead of India. The trade surplus drove the nation's foreign-exchange reserves to US$1.07 trillion (HK$8.34 trillion).

SAFE said it will improve the currency regime and develop the country's foreign-exchange market.

"We will continue to reform the exchange rate in a self- initiated, gradual and controllable manner," China's central bank deputy governor Wu Xiaoling said.The central bank also ordered commercial lenders to set aside money as reserves for the sixth time in 10 months. The reserve ratio was raised by another 0.5 percentage point to 10.5 percent, effective April 16.

The US Commerce Department March 30 levied duties on imports of coated paper from China to compensate for Chinese subsidies to exporters. The move opens the way for a similar measure on steel and textiles. The United States has a record trade deficit with China.

"The tariffs are prompting the Chinese to allow faster yuan gains," said Yuji Saito, a senior currency dealer at Societe Generale in Tokyo. The yuan may strengthen to 7.7247 over the next week, he said.

"Work in 2007 must continue to focus around the aim toward more balanced international payments," Li Dongrong, deputy director of China's currency regulator, SAFE, said. There is a need to "timely analyze global payments and foreign-exchange changes and fully develop the fundamental of letting markets allocate resources."

The yield on the benchmark 10-year government bond fell 2 basis points, or 0.02 percentage point, to close at 3.42 percent, according to China interbank bond market.

The price of the 3.4 percent securities maturing in March 2017 rose 0.13, or 1.3 yuan per 1,000 yuan face amount, to 99.83. Bond yields move inversely to prices.

BLOOMBERG