HONG KONG (AFP) - China should stop buying US debt and gradually cut its holdings of US government bonds, a senior Chinese parliament official said according to a newspaper report.

Cheng Siwei, vice-chairman of the National People's Congress, also said China should increase purchases of US goods to help reduce the trade imbalance, currently in favour of the mainland, according to the Beijing-backed Wen Wei Po daily.

Cheng added that these moves should be carried out gradually.

China held 256.7 billion dollars worth of US treasury debt as of the end of last year, making it the second largest holder.

Last year, China's net purchases of US treasuries stood at 38.7 billion dollars, accounting for half of all net purchases of US treasury bills and bonds.

China's foreign exchange reserves reached 853.7 billion dollars at the end of February, surpassing Japan's to become the world's largest, but there has been speculation it could diversify these holdings to ensure better returns.

The sustained increase in Beijing's forex reserves has been linked by US critics to what they see as a grossly undervalued yuan, which in turn helped create a US trade deficit with China of 202 billion dollars last year.

Cheng repeated Beijing's position that US curbs on high-tech exports to China are a major factor behind this imbalance in Sino-US trade.

At the same time, the yuan's exchange rate should be kept stable in the near-term and China should increase its flexibility at an "appropriate" time.

In the medium-term, the yuan should remain stable, Cheng added.

China revalued its currency by 2.1 percent against the dollar in July last year and replaced the yuan's peg to the US unit with a link to a currency basket.

Cheng repeated the government's objective to make the yuan fully convertible in the long-term but said there was no fixed timetable.

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