UPDATE 1-Bank of China to invest $878 mln in rail project

* Bank of China expects reasonable investment returns

* BOC buys 4.5 percent of the railway company from parent (Adds more details, bank’s comment)

SHANGHAI, April 1 (Reuters) - Bank of China 3988.HK601988.SS, the country's third-biggest lender by market value, said on Thursday it planned to invest up to 6 billion yuan ($878 million) in a state-owned firm building a high-speed railway linking Shanghai and Beijing.

It said its Hong Kong-based unit, Bank of China Group Investment Ltd, has agreed to buy a 4.5 percent stake in Beijing-Shanghai High-Speed Railway Co using foreign currencies, “The investment is expected to generate reasonable return and will help the bank diversify its services,” the Beijing-based lender said in a statement to the Shanghai Stock Exchange.

“It will also help the bank win more businesses in China’s large-scale railway investment and construction, which is in line with our development strategy.”

China last year unveiled a $586 billion, infrastructure-focused stimulus package that boosted railway investment by 67 percent in 2009. Beijing will continue to boost railway investment, which had lagged economic growth in the past decade.

Planned investment in the 1,318-kilometre-long high-speed railway linking Beijing and Shanghai totals 220.9 billion yuan. The project, which started in April, 2008, will be completed within five years.

Bank of China and state rivals such as China Construction Bank 0939.HK and Bank of Communications 3328.HK601328.SS benefited from a government-directed lending spree last year aimed at reviving the economy, but they they plan to curb expansion in 2010 as Beijing starts to tighten monetary policies.

Bank of China Group Investment is buying the stake from China Railway Investment Corp. The deal is yet to be approved by regulators, according to Thursday’s statement. ($1=6.83 Yuan) (Reporting by Samuel Shen; Editing by Jonathan Hopfner and Valerie Lee)