China is sending a "remarkably strong signal" about stemming capital outflows by going after big companies, said Eswar Prasad, the former head of the IMF's China division.

"I think there is a concern here that corporate outflows, among other types of outflows, may be providing a cover for the illegitimate capital outflows, the capital flight that the government is concerned about," Prasad, who is currently a senior professor of trade policy at Cornell University, told CNBC's "Squawk Box" on Wednesday.

"I think this is a very clear signal that they intend to maintain very tight control of the capital account and even so-called legitimate flows are going to be under scrutiny for a while."

Prasad was speaking on the sidelines of the World Economic Forum's "Summer Davos" event in Dalian, China.

China has struggled with capital outflows in recent years, with its foreign reserves dropping from a peak of $3.99 trillion in June 2014 to below $3 trillion in February as the central bank intervened to prop up . There has been modest improvement since; foreign exchange reserved climbed to a seven-month high of $3.054 trillion in May, according to a Reuters report.

China has increased its already-strict capital controls in efforts to keep more money onshore, especially as Chinese firms went on a massive overseas shopping spree. All that money fleeing China added further strain to the economy — and more downward pressure to the yuan.

This month, regulators have upped their game on examining how top Chinese companies such as conglomerate Wanda and insurer Anbang have borrowed money, and how they've structured massive deals, such as snapping up marquee assets from Legendary Entertainment to the Waldorf Astoria hotel.