BEIJING (Reuters) - China should use its foreign reserves to help maintain market confidence in the yuan currency, as expectations of further depreciation have led the exchange rate to overshoot against the U.S dollar, local media quoted a central bank adviser as saying.


The yuan has fallen to eight-and-a-half year lows against the dollar in recent weeks, threatening a surge in capital outflows.


"Now is the best time to stabilize yuan currency expectations," Sheng Songcheng, advisor to the People's Bank of China (PBOC) said during a forum in Beijing, according to the 21st Century Business Herald newspaper.


Sheng said the exchange rate has overshot as depreciation expectations are being reinforced, even though there is no basis for further depreciation as the Chinese economy is stabilizing.


Sheng suggested the PBOC should use part of its foreign reserves to maintain market confidence in the yuan.

The yuan is likely to even start appreciating, if the PBOC can use "even just a little bit of its foreign reserves" to maintain market confidence in the yuan, he said.

"The market would not just listen to what the PBOC says, but look at what it does," he said.

Sheng added that he believed the PBOC could also raise interest rates "gradually".

(Reporting by Yawen Chen and Kevin Yao; Editing by Richard Pullin)