Each dog is different but this is normal behavior for many puppies and young dogs. Build her confidence by being a confident leader for her. You can do this by setting and enforcing rules of behavior through obedience training and the use of nilif (nothing in life is free). If she has basic obedience skills (come, sit, down, stay), agility lessons are fun as well as a great confidence booster.
Encourage, but don't force her to explore new things under your supervision. Take her to as many different places as you can, even if just to sit outside a place she can't go in so that she can observe many people. BUT, she does not need to actually greet everyone. It's perfectly legitimate for you to tell people to ignore her and just let her watch them. Don't coddle her when she acts "shy," but also don't force her to greet anyone.
Papillons are great and very intelligent little dogs that do very well in sports such as obedience, rally, and agility. If you can find it, read MEMOIRS OF A PAPILLON by Genevive.
Memoirs of a Papillon: The Canine Guide to Living with Humans Without Going Mad: Amazon.ca: Genevieve, Dennis Fried: Books It's a very cute book and captures the breed's personality beautifully.
And don't worry about your little girl, she's just going through a stage. As long as you give her the leadership and direction she needs she'll soon gain confidence.
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