UPDATE 1-China c.bank says "dramatically reduced" yuan intervention

* yuan near equilibrium, central bank deputy head says

* yuan driven by market, intervention "dramatically reduced"

(Adds details, quotes) By Koh Gui Qing

TOKYO, Oct 12 (Reuters) - China argued on Friday that the yuan is close to its equilibrium level as the central bank has "dramatically reduced" its intervention in currency markets, rebutting criticism that Beijing suppresses the currency to help exports.

China central bank's deputy governor Yi Gang said the fact that gyrations in the yuan, also known as the renminbi, were now dictated by market demand and supply implied it was close to equilibrium, a level he said is otherwise tough to determine.

In unusually frank remarks, Yi said he expected China's economy to grow in the "neighbourhood" of 7.8 percent this year with annual inflation seen hitting around 2.7 percent, well under the government's 4 p ercent tar get.

Addressing investor concerns about the health of the world's No. 2 economy, Yi said China's property market has stabilised and that Beijing was trying to balance competing needs of squashing speculation, and supporting a key pillar of the economy.

"I am glad to report to you that the renminbi exchange rate is very close to its equilibrium level," Yi said at a conference on the sidelines of International Monetary Fund and World Bank meetings in Tokyo.

"People might not know that the People's Bank of China has dramatically reduced the intervention in the market place. For the past more than one year, the official reserves of China have been flat," he said.

China's $3.3 trillion foreign exchange reserves have indeed hovered around the same level in the past year after leaping eight times in the last eight years to become the world's largest stockpile.

Analysts say China's huge export revenues and its undervalued currency contributed to the rapid build-up. Yi heads the State Administration of Foreign Exchange, China's currency regulator which manages the reserves.

Still, the yuan remains tightly controlled by Beijing. The central bank fixes a mid-point for the yuan every trading day, from which the currency can rise or fall just 1 percent.

China's trade partners, especially the United States, have long argued that Beijing deliberately holds down the yuan for unfair trade advantage. China has always denied these accusations.

The International Monetary Fund has said the yuan was moderately undervalued.

The yuan crept to a new closing high against the dollar on Friday for a second day after a stronger fixing of the mid-point.

PROPERTY DILEMMA

China's property market, which accounts for 13 percent of its gross domestic product and affects over 40 other sectors, is mired in its worst slowdown in three years.

A slowing Chinese economy and measures taken by the government to stamp out speculation have hit the housing market, to the growing alarm of some economists who fear Beijing is over-asserting itself and hurting legitimate sources of growth.

Yi acknowledged those concerns on Friday in a rare admission

of Beijing's property dilemma.

"Housing prices in Beijing and Shanghai, the large cities in China, are already very high. I think, you see, we should consider policy measures to prevent a housing bubble. That is definitely not the scenario we want to see," Yi said.

"On the other hand, we also realise that housing (is) a very important industry in terms of growth and also related to consumption," he said. "So we are in a very delicate situation to maintain the stability."

China's house prices were scaling record highs before the government, worried that unaffordable housing would trigger social unrest, acted forcefully to stamp out exuberance.

Down payments were raised, property taxes introduced, and the number of homes Chinese can buy were limited.

Yi said Beijing would continue to do what it can by building more low-cost public homes, but added: "We have to respect market forces".

Compared to a year ago, China's house prices are still falling but a gentle recovery has taken hold on a month-to-month basis. Prices rose 0.1 percent in August from July.

China's economic growth is limping at three-year lows and analysts polled by Reuters in September estimated full-year growth will stand at 7.7 percent, the weakest in 13 years but still above Beijing's 7.5 percent target.

(Reporting by Koh Gui Qing; Writing by Emily Kaiser; Editing Neil Fullick and Tomasz Janowski)

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