UPDATE 2-Firm yuan to help rebalance China economy - IMF Lipsky

* Yuan may be included in SDR if more widely used - Lipsky

* Urges China to lift consumption, contain trade surplus

* Says China should lean on yuan to rein in inflation

* IMF backs China policy tightening but warns of bubble propensity (Updates with IMF statement)

By Kevin Yao

BEIJING, June 9 (Reuters) - The International Monetary Fund on Thursday urged China to allow the yuan to rise further to rebalance its vast economy and Should lean more on conventional policy tools, such as interest rates, to wrestle inflation under control.

Speaking at a press briefing in Beijing, John Lipsky, the IMF's acting chief, reiterated the fund's view that the yuan could be included in the IMF's Special Drawing Rights (SDR) over time if it becomes more widely used in world trade.

Lipsky's call for a firmer yuan, also known as the renminbi, echo those of China's top trading partners, who routinely say China needs to let its currency rise more to tilt its economy away from exports and toward domestic consumption.

"A stronger renminbi will be one ingredient of a comprehensive package of reforms," Lipsky said, adding that China was helping to stabilise the world economy by shoring up its consumption.

"We certainly agree that over time the yuan is likely to become a candidate for inclusion in the SDR."

Lipsky urged China to press on in liberalising its financial markets and make the yuan fully convertible eventually.

The SDR, an internal unit of account for the IMF, the value of which is set by the euro, yen, sterling and U.S. dollar, has often been suggested as a global quasi-reserve currency alternative to the greenback.

The idea gained more traction after the 2008 financial crisis, when China led calls for greater prominence for the SDR.

With an eye on its trillions of dollars in investments, China has pressed for other currencies, including the yuan, to be included in the SDR. It argues that global financial markets are too reliant on the dollar and thus too vulnerable to swings in the U.S. economy.

But the yuan has its fair share of critics too. China's biggest trading partners have said Beijing suppresses its tightly-controlled currency to boost exports.

Lipsky said that while China had done well in lifting domestic consumption since the 2008 crisis, Beijing still had its work cut out for it in holding down its current account surplus.

To that end, he said Beijing was moving in the right direction by aiming to boost household incomes and build more social safety nets in its 12th five-year plan, an overarching economic grand plan.

He noted, however, that China faced near-term risks from rapid expansion in bank lending in the past two years.

LEAN ON RATE RISES

In a statement after an annual review of the world's second-largest economy, the IMF said Beijing's efforts to tighten monetary policy were "fully appropriate", although its property market still has a propensity for bubbles.

The IMF said China should lean more on conventional policy tools, such as interest rate rises and a stronger yuan, in its battle against inflation, which is running near 3-year highs.

"A more balanced use of monetary policy tools, including more reliance on interest rates and less use of direct administrative limits on loan growth would help achieve the intended policy objectives more effectively," it said in the statement.

China's inflation should soon peak, and fall to around 4 percent by year-end, the global agency said. However, it flagged upside risks from higher global commodity prices or weather-related food supply shocks within China.

There have long been market concerns that China may be hobbled by a mountain of bad debt after local governments embarked on a borrowing spree following the 2008 crisis to shore up domestic economic growth.

But Nigel Chalk, the IMF's mission chief to China, said he thought the risks arising from rampant borrowing by local Chinese governments were contained.

On the overall trend in global monetary policy, Lipsky said policies in advanced economies, including the United States, may remain accommodative in the near-term to support growth since inflation was still largely benign.

"Over time, monetary policy needs to be normalised as the economy recovers but that's not the focus now,' he said. (Writing by Koh Gui Qing; Editing by Chris Lewis and Ramya Venugopal)