BEIJING - China's financial sector should stress quality amid rapid development and tighten supervision of foreign capital inflows, said Wang Guogang, head of the finance and banking institute at the Chinese Academy of Social Sciences.

The economist said it would be unwise for China to loosen restrictions on foreign capital as the United States might begin another round of quantitative easing.

Because China's banks offer higher interest rates than those in many developed economics, so-called hot money is likely to continue flowing in and could fuel an asset bubble, Wang told China Daily in an exclusive interview.

"China should avoid a repetition of the Southeast Asian financial crisis. The most important task currently is to tighten supervision over financial transactions" and not remove capital inflow barriers too fast, he said.

Vice-Premier Li Keqiang announced during a mid-August visit to Hong Kong that support will be given to Hong Kong enterprises in yuan-denominated direct investment in the mainland.

The Ministry of Commerce also released a draft regulation on cross-border yuan-denominated direct investment that it will seek to implement in September.

Such steps "will broaden capital circulation channels between the domestic and outbound financial markets. However, the government should carefully research the regulations and control hot money," said Wang.

The US might further increase the money supply and allow the dollar to depreciate in the long term to reduce the risks of a sovereign debt crisis, Wang said.

Since August 1971, when then US president Richard Nixon took the dollar off the gold standard, the currency "has depreciated by 50 times compared with gold prices. Dollar depreciation is the key benefit for the US", he said.

Under the current exchange rate regime, China should take measures to slow the yuan's appreciation to help export-led enterprises while urging the US to protect holders of its debt and limit China's losses on foreign exchange reserves, Wang told China Daily.

China's financial markets developed rapidly during the internationalization process, but the sector still lacks talent and technology, he said.

"Large losses overseas by China's institutional investors during the 2007 global financial crisis illustrated their lack of sophistication compared with the world's advanced financial players. The development of the financial sector needs to focus more on quality than quantity," according to Wang.

A report by the World Federation of Exchanges showed that as of end-2010, the capitalization of China's A-share market was 26.35 trillion yuan ($4.13 trillion), up 8.66 percent over 2009. The market has surpassed Japan's stock market to become the world's second-largest.

China's futures market was also the largest in the world last year, with transaction volume hitting 309 trillion yuan.

"Although the transaction volumes of China's stock and future markets are increasing fast, the challenge is how they can better support the real economy," said Wang.

"To improve the quality of the two markets, improvement in the profitability of shares is needed as well as enhanced pricing power in global commodity markets," Wang added.