Currency liberalization a slow process

Yu said that such a strategy could hurt the government's credibility, and regulators must remain prudent when opening the capital account. Recent capital outflows that appear to be illegal have alarmed regulators.

Analysts believe that one common channel for companies to evade capital controls is through a practice known as round-tripping foreign direct investment. By registering an entity in an overseas tax haven such as the Virgin Islands, Chinese companies can disguise capital flows as FDI, which can mean lost tax revenue and cause "distortions", Yu said.

False trade invoicing is another way for Chinese companies to make illegal capital transfers, Yu said.

The government seems to have toned down the rhetoric on the full convertibility of the yuan under the capital account, which demonstrates a prudent attitude toward capital liberalization, Yu said.

But this does not mean that capital account reform has stopped. The central bank is accelerating the establishment of cross-border interbank payment systems, for instance.

The system will help boost the international use of the yuan and reduce transaction costs. More importantly, such mechanisms allow regulators to better monitor and target illegal cross-border capital flows, analysts have said.

The China (Shanghai) Pilot Free Trade Zone is a testing ground for capital liberalization. Regulators plan to grant qualified individual investors within the free trade area larger quotas to engage in overseas investment.

Lu Lei, head of the research bureau at the PBOC, told the audience at a recent economic forum in Beijing that a fully convertible yuan under the capital account requires a "robust and prudent market" and institutional mechanisms within the financial system.

"It is not simply an announcement made by the monetary authorities," he said.