* IMF funds will slow reserve build-up, not a substitute
* Asia not convinced yet IMF reforms have been enough
* China aware it will benefit from more yuan flexibility
By Lesley Wroughton
WASHINGTON, April 14 (Reuters) - Reserve-rich Asian countries will probably want to keep their large cash reserves to insure against future economic crises even with bulked-up International Monetary Fund lending, the IMF's senior Asian official said
Naoyuki Shinohara, who joined the IMF two months ago as deputy managing director, told Reuters IMF funds would help slow the pace of reserve accumulation although Asian countries are unlikely to altogether forego their large currency reserves.
"I do not think the IMF's lending facilities will have a significant impact on reserve accumulation," said Shinohara, Japan's former vice finance minister for international affairs.
"It will work to some extent but (let us) not pretend that it will be a substitute for reserve accumulation," he added.
The IMF has proposed a significant increase in its resources, possibly up to $1 trillion, to bolster its role as an international lender of last resort and to reduce the incentive for countries to accumulate large currency stockpiles as a way of insuring against economic crises.
"Reserves are money they can use freely without any conditionality or having to ask anybody, so everybody wants to have it," Shinohara noted.
Many Asian countries are hesitant to rely on the IMF for financial assistance because its loans come with conditions and there is concern that could stall access to the funds.
He said international financial stability would be the biggest incentive for countries in Asia not to ratchet up their international reserves. Asia is home to seven of the world's top holders of foreign reserves.
He said the IMF should work more closely with such regional Asian schemes as the Chiang Mai Initiative, which recently unveiled a $120 billion emergency fund by east and southeast Asian countries to avert a repeat of the 1997-98 Asian financial crises.
A nagging problem is a long-held perception in Asia that the IMF mismanaged the 1997-98 crisis, prompting many countries to swear they would never go cap in hand to the IMF again.
Shinohara said, however, there were signs that Asian countries were encouraged by recent changes in the global institution, including more flexibility and fewer conditions attached to loans.
"They feel that IMF has become a little more flexible, a little bit more practical and its policy advice has become a little more tailor-made," he added. "They feel the change but I'm not sure whether they feel the changes have been enough," he added.
Still, he acknowledged that the IMF would not easily shed the stigma associated with its loans.
"It is not easy because that stigma comes from the experience in the Asian financial crisis and that was more than 10 years ago," Shinohara said.
He said it was a "basic necessity" for the IMF, long dominated by the United States and Europe, to give emerging market economies a greater say in the institution through a substantial increase in their subscriptions, or quotas.
That politically-charged process is currently under way in negotiations expected to be completed by early 2011.
CHINA CURRENCY
While IMF economists believe some countries' reserve accumulation was a conscious attempt to insure against the impact of crises, for others it was part of an export-led growth strategy that included holding down exchange rates.
The United States has pressed China to allow its currency to appreciate faster to address economic imbalances but Beijing has said it will not act under outside pressure.
Shinohara said China was aware that a more flexible foreign exchange regime was in its own interest.
"I believe China knows that the exchange rate flexibility is for the benefit of China," he said, adding that China was worried about the possible impact a steep revaluation would have on its economy.
"At the same time, they know an appreciation is good for the rebalancing of the Chinese economy. It is up to them to decide," he added.
The official IMF line is that the yuan is significantly undervalued.
Asked whether the IMF had a role to play in easing the currency spat between Washington and Beijing, Shinohara added: "The tension between the U.S. and China is political. The IMF cannot intervene in political issues," he said, adding that the Fund could assist through analysis and its regular economic consultations with member states. (Editing by Theodore d'Afflisio)