Capital Outflows

China's economy expanded 11.3 percent in the second quarter, fuelled by surging exports and spending on new factories and real estate. Fixed-asset investment rose 30 percent in the first half from a year earlier, the most since the first quarter of 2004.

"We will use various monetary tools to reasonably control lending growth and prevent the economy from overheating," the central bank said. "We will speed up the implementation of the policy of boosting domestic spending and adjusting the economic structure to promote the balance of international payments."

The central bank said it will "adjust the bias in the management of foreign exchange which currently encourages foreign-exchange inflows and restricts outflows."

The government is loosening controls after China's foreign-exchange reserves doubled in the past two years to become the world's largest, reaching US$941 billion at the end of June.

Citigroup Inc., the world's largest financial services firm, said Wednesday it won approval to convert yuan deposits into foreign exchange for investment abroad under a qualified domestic institutional investor program. Since April, China gave six institutions approval to invest a combined US$8.3 billion.

Tax Rates

The central bank said the exchange rate alone cannot resolve the imbalance in the country's trade and capital accounts.

China's current account surplus more than doubled to US$161 billion last year, accounting for 7 percent of the nation's gross domestic product. The central bank said on May 22 the nation will maintain a "relatively large" gap this year.

The capital account surplus, which narrowed to US$63 billion in 2005 from US$111 billion a year earlier, will also stay "relatively large," the bank said that day.

The government will adjust preferential policies toward foreign companies, speed up the unification of domestic and foreign company corporate income tax rates and regulate policies by local government to attract foreign investment, the central bank said in Wednesday's report.