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UPDATE 1-China says capital flows stable, 2-way yuan swings becoming the norm

* Yuan appreciation market-driven - China FX regulator

* Fed impact on China capital flows weakening

* FX sales by Chinese banks fall to $111.6 bln in 2017 (Adds detail)

BEIJING, Jan 18 (Reuters) - China's foreign exchange regulator said on Thursday the yuan's recent appreciation is driven by the economy and a weaker dollar and that it expects two-way fluctuations in the currency to be the norm.

State Administration of Foreign Exchange spokeswoman Wang Chunying also told reporters China's investment in U.S. Treasuries is market-driven, while the impact from the Federal Reserve's policy normalization on capital flows in China is weakening.

The Chinese yuan strengthened against the dollar last year as the dollar weakened, and capital outflows eased considerably as authorities clamped down on money leaving the country.

Wang's comments suggest Chinese policymakers are comfortable with the yuan's current levels and are becoming less concerned about the kinds of capital flows that prompted wild one-way swings in the currency in 2015 and 2016.

"2017 was a year when China's cross-border capital flows went from net outflows to basically stable," said Wang.

"Over the previous three or four years, due to domestic and overseas influences, China's cross-border capital flows went from long-term inflows to a period of outflows. But from 2017 our capital flows experienced a change."

China purchased a net $6.0 billion of foreign exchange in December, compared with a net sale of $7.5 billion in November, SAFE said on Thursday.

For all of last year, Chinese banks sold a net $111.6 billion in foreign exchange, indicating there was still demand from companies and individuals for foreign currency, but the amount was down considerably from $337.7 billion in 2016.

"China will continue to deepen market-based foreign exchange rate reform, further improve the yuan exchange rate mechanism, enhance the flexibility of the yuan exchange rate and keep the yuan basically stable in a reasonable range," Wang said.

China's yuan rose against the dollar to its highest in more than two years on Wednesday, as the central bank set firmer guidance amid broad dollar weakness and heavier corporate dollar selling.

The Chinese currency has risen nearly 1.2 percent against the dollar this year, after a roughly 6.8 percent gain during 2017, reversing three straight years of depreciation. (Reporting by Kevin Yao; writing by Elias Glenn; Editing by Jacqueline Wong and Sam Holmes)