BEIJING, Feb 4 A senior central bank official said on Sunday that China had mopped up muc

BEIJING, Feb 4 (Reuters) A senior central bank official said on Sunday that China had mopped up much of the excess liquidity derived from massive trade and investment flows but needed to remain alert to keep money supply and credit in check.

In order to hold down the value of the Chinese currency, the central bank has issued around 6.4 trillion yuan ($825 billion) to buy inflows of $780 billion between 2003 and 2006, Yi Gang, assistant governor of People's Bank of China, told a forum.

To mop up some of the resulting excess liquidity, the central bank has sold 3 trillion yuan worth of central bank bills and absorbed 1 trillion yuan from banks by raising the amount commercial lenders have to hold in reserve by five times, he said.

''Liquidity conditions remain relatively loose, although the problem is not as serious as many might think,'' Yi said. ''We will keep stepping up our efforts to mop up liquidity.'' An abundance of liquidity in the financial system has helped fuel rapid growth in loans and investments in recent months and has fuelled fears that China's economic boom could turn to bust.

Turning to the issue of inflationary pressure and prospects for higher interest rates, Yi said that grain prices, the main driver behind a 2.8 percent spike in consumer price inflation in December, would probably ease.

A bumper harvest in 2006 is likely to have a cooling effect on grain prices, he said. ''I think the possibility of large and enduring grain price rises is fairly remote.'' Yi sidestepped a question on whether Beijing had decided to allow the finance ministry to issue yuan-denominated bonds to purchase foreign exchange reserves from the central bank.

Speculation over how China will overhaul the way it manages its foreign exchange reserves has intensified, especially after leaders agreed last month to actively explore ways of expanding the investment channels for its over $1 trillion stockpile.

According to last week's Southern Weekend newspaper, Beijing plans to set up a new agency to manage a fifth of the reserves as part of a shake-up that will divide management responsibility for the stockpile among three bodies, including the finance ministry.

On the subject of the yuan, Yi reaffirmed China's longstanding goal of keeping the currency stable and gradually pursuing exchange rate reforms.

Adjustments to the yuan are no panacea to addressing the country's economic imbalances, he said, adding that a more systematic approach -- greater imports, more outward investment and better protection of the environment -- would have more of an impact.

REUTERS DKS RN1848