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Asian banks protect local economy against foreign market volatility

By Brian Anderson
Published: Sunday, July 11th, 2010

13Local banks in Asia are now trying to minimize the number of offshore borrowing and usage of foreign currency for transactions where local currency can instead be used. South Korea, is particular, is going the extra mile to prevent any of the past financial turmoils from happening again in their country. Their government of South Korea found out that the reason for the past economic problems lies in the surging capital inflow and outflow. Learning from experience, the government now tries to evade problems by keeping track of the flow of capital and the usage of the dollar currency.

Nowadays, South Korea imposed a rule that foreign currency will only be used for overseas transactions and nothing more. This will reduce the volatility of the Won (the national currency of South Korea) and will thus save exporters from the headache of finding foreign currency for their international transactions. If there is enough dollar reserve in the country then there will be no problem with finding enough foreign currency for transactions needing dollar currency. Thus, problems in the financial sector will be evaded.

By guarding the local economy from possible effects of the volatile foreign markets, the country is able to offer a stable economy for its nationals. And with a strong economy, it is able to make productive business decisions for the people. Strong markets will push people to spend money on locally produced goods which will fund further production undertakings. The return of investment comes in two ways: one is through the taxes given to the government and the other is through the expansion of businesses which will give employment to more people. And as analysts would say, the lower the unemployment level more people are enticed to spend on products aside form basic necessities. This is how the cycle of economic activity goes.

And with lower unemployment rate, banks are better able to grant loans to businesses eyeing expansion or individuals who want to create their own businesses. There are a lot more available loans for people during times of better economy because the lenders are also less skeptical about people not paying their loaned amount on time. Thus it is in the best interest of the people to have a government that protects local economy from being affected by turbulent foreign markets. It is also good to maintain a productive economy which will then spur more taxes, more loan made available by both governmental and private loan providers.

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