Regulator says Citi should expand in China - WSJ

* Citi's China unit was prudent during crisis - regulator

* Citi has grown less than rivals in China - regulator

NEW YORK, Sept 29 - Citigroup Inc, the third largest U.S. bank, should expand its operations in China, according to a Chinese regulator cited by The Wall Street Journal on Tuesday.

Citigroup's China unit was prudent during the financial meltdown and now should be "expanding, absolutely," Yan Qingmin, director of the Shanghai branch of the China Banking Regulatory Commission, told The Wall Street Journal in an interview posted on the paper's website.

Yan Qingmin said he was not worried about the U.S. government's 34 percent stake in Citigroup, adding that Washington's support for Citigroup was the right decision and that it has done little to alter how Chinese policy makers regard the financial services giant.

Over the past year, Citigroup has expanded in China, but not as much as other foreign banks, Yan said, according to the article.

Citigroup, hurt by billions of losses and write-downs of bad loans and toxic assets, had to be rescued twice in the last year by the U.S. government with $45 billion.