UPDATE 1-China president's confidante Liu He nominated as a vice premier, Yi Gang as PBOC chief

Gang as PBOC chief@ (Adds background on Liu He, Yi Gang)

BEIJING, March 19 (Reuters) - Liu He, a key economic adviser to China's President Xi Jinping, was nominated to be a vice premier, while vice central bank governor Yi Gang was nominated to take over the helm at the People's Bank of China (PBOC).

China is overhauling key government positions as Xi begins his second five-year term as president.

Beijing is merging its banking and insurance regulators, giving new powers to policymaking bodies such as the central bank, and creating new ministries in the biggest government shake-up in years.

Liu, a Xi confidante, has a deep understanding of the country's economic issues and is an emerging star in Chinese politics.

Last October, he was elected into the 25-member Politburo, the second-highest tier in Beijing's political power structure after the seven-member Politburo Standing Committee.

Liu, 66, has been the head of the General Office of the ruling Communist Party's Central Leading Group for Financial and Economic Affairs and a vice minister of the National Development and Reform Commission (NDRC) - China's top economic planner.

U.S.-educated Yi, 60, a protege of outgoing PBOC chief Zhou Xiaochuan, has been vice PBOC governor since 2008. He is seen as instrumental in steering monetary and currency policy, including the landmark yuan devaluation in 2015.

But Yi is not regarded as a heavyweight like his boss Zhou, and he may play a supportive role with Liu overseeing the economy and finance sector on the whole, some economists say.

"Frankly speaking, (Yi's nomination is) a bit unexpected as he holds a relatively low political ranking as the alternative member of CPC Central Committee," said Tommy Xie, China economist at OCBC Bank in Singapore.

The Central Committee is the largest of the party's elite decision-making bodies, and is made up of 204 full members and about 170 alternate members.

"In terms of implication, we see policy continuation as Yi will support Liu He to drive economic reform. Both are the main driver to China's reform in the past few years," Xie said.

Yi, one of the highest-ranking "sea turtles" - a colloquialism for Chinese returning from overseas - has a PhD in economics from the University of Illinois. He was also the head of the State Administration of Foreign Exchange (SAFE) from 2009 to 2016.

With Yi's background and his reputation of being pro-reform, his nomination would be good news for foreign investors, Xie also said.

The nominations were read out at the Great Hall of the People in Beijing on Monday during a parliamentary session, with journalists in attendance.

Separately, Liu Kun, a former vice finance minister, was nominated to be the new finance minister, replacing Xiao Jie. (Reporting by Shu Zhang and Christian Shepherd Additional reporting by Kevin Yao Writing by Ryan Woo; Editing by Sam Holmes and Kim Coghill)