China's yuan is moving towards equilibrium after a volatile second half of 2011 and there will be a sharper focus on cross-border capital flows to fight speculation in the fledgling foreign exchange market, the industry regulator said on Monday.

China saw an unprecedented outflow of capital in the last three months of 2011, as measured by foreign exchange sales made by commercial banks and the People's Bank of China, puzzling many investors who were left unsure of the implications for monetary policy.

In the second half of 2011, particularly since the fourth quarter, our country's foreign exchange situation experienced significant changes and the yuan is moving towards its equilibrium level, the State Administration of Foreign Exchange (SAFE) said in a statement on its website (www.safe.gov.cn).

We will pay high attention to any tendency in cross-border capital flows, SAFE said, adding that it would try to find a better indicator to more accurately capture the movement.

Meanwhile, the regulator will work out more plans to tackle sudden capital inflows as well as outflows, it said.

While squeezing the room for arbitrage, China will also speed up the development of its foreign exchange market and improve underwritting mechanisms so as to let the market play a better role in balancing supply and demand.

China is gradually lifting capital controls. Last year, it allowed all companies to park export income abroad and scrapped restrictions on the amount of foreign exchange a firm can buy in order to invest in foreign nations.

But SAFE said it would keep cracking down against hot money flows.

China launched special campaigns in March 2011 and November 2010 to catch abnormal cross border capital flows.

It detected more than 150,000 illegal cases, fining individuals and companies a total of 1.3 billion yuan in the years between 2007 and 2011, SAFE said.

(Reporting by Langi Chiang and Nick Edwards; Editing by Kim Coghill)