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UPDATE 1-China's campaign to cut debt enters new stage - stock exchange official

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* China to tighten financial sector rules in new stage of deleveraging

* "Bloated" financial sector threatens economic growth, poses risks

* China has bought time to defuse credit risks (Adds background, more details)

SHANGHAI, Dec 18 (Reuters) - China is in a new phase of its campaign to cut debt, focusing on rules to shrink a bloated financial sector that has grown rapidly as product innovation outpaced regulatory oversight, a senior researcher at the Shanghai Stock Exchange said.

The financial sector has threatened growth by crowding out resources in the real economy, while the ballooning shadow banking business has boosted money supply and created expectations of asset price inflation, said Shi Donghui, director of the Shanghai exchange's Capital Market Institute.

"China's bloated financial sector ... has siphoned talents and other resources from the real economy, and has reached a tipping point at which it starts to slow, rather than stimulate growth," Shi told a CFA annual conference in Shanghai on Sunday.

"Having stabilized debt growth on a macro level, the focus of the next phase is to toughen supervision over leverage on a micro level."

China has proposed new rules to better regulate its asset management industry, the key contributor to the shadow banking expansion. It is also tightening banks' liquidity management and cracking down on micro-lending and low-rated insurers.

The International Monetary Fund (IMF) has warned that China's excessive debt levels would pose a risk to Asia. According to the People's Bank of China, the country's overall leverage ratio stood at 247 percent at the end of 2016, with corporate leverage ratio exceeding the international red line, at 165 percent.

Shi said China's high leverage is the result of previously loose monetary and fiscal policies aimed at stemming a slide in economic growth in the aftermath of the 2008-09 global financial crisis, but the side-effects are starting to work against government goals.

But instead of sharply slashing leverage, which would have dealt a hard blow to the economy, China used "financial engineering" to move liabilities among various entities to buy time, Shi said.

For example, through public-private partnership (PPP) schemes, China moved local government debt to the private sector; through property destocking, corporate debt was partly turned into residential debt; and through supply-side reforms, liabilities in the upstream industries were partially shifted to the mid-stream sectors.

"China has stabilized overall debt levels. And now, we have time to reduce leverage." (Editing by Clarence Fernandez and Jacqueline Wong)