SHANGHAI (Dow Jones)--China guided its currency sharply higher for a third time this week Thursday, surprising investors and reinforcing the view that Beijing is shifting gears to a faster pace of yuan appreciation to contain inflation. The yuan shot to a fresh record high against the dollar after the People's Bank of China lowered its dollar/yuan parity setting by the largest margin in nine months.

So far this week, China has let the yuan strengthen against the dollar by 0.75%, compared to an appreciation of around 3% over the past 6 months. The move came as a prominent economist at a top Chinese state think tank said the turmoil in global markets presents China with an opportunity to make the yuan a freer and more international currency and urged the central bank to widen the trading band in which it keeps the tightly-controlled yuan.

"It's the third surprise fixing of the week, so it's pretty clear now that the PBOC is going to let the yuan appreciate faster," said a Shanghai-based local bank trader.

The PBOC set the dollar/yuan reference exchange rate, or central parity rate, at a fresh record low of 6.3991, down from 6.4167 Wednesday, the previous record. The dollar fell as low as CNY6.3895 in onshore trading, the lowest intraday level since China's landmark currency reform in 1994. It recovered slightly to CNY6.3920 at 0751 GMT, but remained well below Wednesday's close of CNY6.4181.

The yuan's gains also lifted some regional currencies, including the Singapore and Australian dollars, which are heavily influenced by trade with China.

The move came as Asian stock markets convulsed following heavy losses on Wall Street overnight as concerns about Europe's deepening debt crisis and a downturn in the U.S. economy soured sentiment.

Economists said with Chinese consumer prices rising fast but the economy slowing, Beijing may prefer using the yuan, instead of interest rates, to rein in inflation, which hit a three-year high of 6.5% in July. For the U.S. and Europe, this could offer much-needed help in the form of stronger demand for their products from China, the world's second biggest economy.

China took other steps to buffer its economy from the turmoil overseas, with the PBOC injecting a net CNY70 billion ($10.9 billion) into the money market this week through its open-market operations, the largest weekly fund injection since late June. Traders said this helped soothe investors' nerves.

Zhang Ming, an economist at the Chinese Academy of Social Sciences, a top state think tank, said China should use the current turmoil in international markets as an opportunity to make the yuan more flexible and widen the yuan's daily trading band.

"We should not re-peg the yuan to the dollar again as soon as an international financial crisis breaks out," Zhang wrote in an essay distributed Thursday. Emmanuel Ng, a currency strategist at OCBC Bank, said China's appetite for U.S. Treasury bonds "has been waning noticeably."

"Given the underlying trend of dollar weakness, nobody can fault them now if they grant more flexibility to the renminbi," said Ng, adding that this would spell further dollar weakness against other Asian currencies.

Reflecting heightened expectations of quicker yuan appreciation, 12-month yuan non-deliverable forward contracts in the offshore market registered their largest move in more than a year. Late Thursday they were pricing in yuan appreciation of 2.1% over the next year, versus just under a 1% rise on Wednesday. However, some market players cautioned against assuming that the yuan is a one-way bet. They said Beijing might be testing the market, paving the way for greater yuan moves in either direction at a time when expectations for strong appreciation are low.

In his essay, Zhang said China's central bank should also consider intervening in foreign exchange markets to "manufacture" two-way movement in the yuan exchange rate, breaking the one-way expectations for yuan appreciation.

Bank Indonesia Deputy Gov. Hartadi Sarwono said a stronger Chinese currency will have a positive impact on trade within Asia and likely improve Indonesia's export competitiveness.

Other regional authorities didn't appear poised to alter policy course.

An official at Taiwan's central bank said it doesn't--and shouldn't--have rules that restrict capital outflows. The Bank of Korea, which held interest rates steady Thursday as expected, said it sees increased risks of a slowdown in the domestic economy due mainly to external uncertainties and warned an upward trend in consumer price inflation will likely persist for some time. Yoon Jong-won, head of the Economic Policy Bureau at South Korea's Ministry of Strategy and Finance, said the government isn't planning any sudden shifts in its macroeconomic policy at this time. Read More