UPDATE 1-China needs policy shift to support growth-JPMorgan

(Adds details, background)

SHANGHAI, Aug 26 (Reuters) - China's economic growth could slip below 9 percent, after years of double-digit rises, if the government does not make drastic policy changes, JPMorgan Chase's chief China economist Frank Gong said on Tuesday.

He added that his note to clients last week on a possible economic stimulus package of at least 200 billion to 400 billion yuan ($29-58 billion), which spurred a nearly 8 percent rise in the benchmark Shanghai Composite Index .SSEC last Wednesday, was based on his own research rather than official sources.

But the 200 billion to 400 billion yuan estimate, equivalent to 1.0 to 1.5 percent of GDP, was "very conservative", he said, noting the impact of slowing exports and a sluggish housing market.

"If the government sits there doing nothing, the economy will slow down significantly," he told a lunch meeting with reporters.

During the Asian financial crisis at the end of the last decade, he noted, the Chinese government increased its fiscal deficit to 3 percent of GDP from 1 percent, helping to avert a slowdown and laying the groundwork for future growth.

The need for stimulus spending also matches the country's urgent requirement to build up infrastructure such as rail transport to ease bottlenecks, he said, while taxes could easily be cut by 100 billion yuan.

With appropriate fiscal stimulus, the economy could maintain 10 percent growth, he added.

He also expected the central bank to cut the bank reserve ratio by 50 basis points in the second half of the year, as a slowing influx of speculative funds into China and decelerating exports will ease the problem of excess liquidity.

The government should form a $100 billion stock stabilisation fund from its hefty foreign exchange reserves, he said, to help the market cope with large volumes of shares that are becoming tradeable after the expiry of lock-up periods under reforms of state shareholdings.

"If you have this fund, it can bring confidence back," he said, adding that the fundamentals of domestically listed A shares remained strong and valuations were low.

He also expected the yuan to continue appreciating against the dollar, but at a much slower pace. ($1=6.844 Yuan) (Reporting by Samuel Shen; Editing by Keiron Henderson)