BEIJING (XFN-ASIA) - Price stability is the ultimate goal of China's monetary policy, with time needed to adjust to changes in the exchange rate regime, according to Wu Xiaoling, vice governor of the People's Bank of China.

Accordingly, China should not rush into making the yuan exchange rate system more flexible, Wu said in an academic paper made available at a conference here.

"Stablization has been a important task of central bank monetary policy for some time, but the central bank's ultimate goal is maintaining price stability," Wu wrote in the paper.

"To what extent the yuan exchange rate should become more flexible should be agreed through thorough discussion and the reaching of a consensus," Wu said.

"Increasing the flexibility of the exchange rate must stick to the principle of taking a gradual and controllable approach, on our own initiative. We mustn't rush," she said.

Wu was apparently referring to external pressures on China for yuan reform, specifically from trading partners who believe the currency represents an unfair advantage.

"Companies have been operating in an environment of stable interest and exchange rates," she added. "We must give Chinese companies time to adapt to changes in interest and exchange rates."

In the largely academic paper, Wu said that east Asian foreign exchange reserve holdings "face two problems."

"Firstly, long-term interest rates are falling (meaning lower returns on bond investments). Secondly, the exchange rate of the US dollar, which is the major reserve currency, is going lower, increasing the depreciation risk for east Asian reserve assets," Wu said.

However, she said that China's trade surplus with the US cannot be solved solely through adjustments to exchange rates, noting that China's comparative advantage lies mainly in labor costs.

She also said that the imbalance in international payments "is still a prominent problem."

Wu said that in order for China's trade surplus to fall, other countries must remove their curbs on exports to China.