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South Korea Takes Steps to Limit Foreign Currency Borrowing

South Korea's central bank said on Friday it would restrict the purposes of foreign-currency lending to local customers to capital investment by manufacturing firms and payment in overseas projects.

The Bank of Korea also said in a statement it would ban foreign-currency lending whose proceeds are eventually to be converted into won. The measures will take effect from Aug. 10, it added.

The Finance Ministry and central bank officials have said they might take steps to restrict foreign-currency borrowings, which they said were pushing up the won and posed a potential threat to financial stability.

The central bank said it expected the measures to help reduce overseas borrowings and at the same time increase demand for foreign currencies to pay back loans borrowed in the past for non-authorized purposes.

It said foreign-currency lending to local recipients totaled an outstanding $44.1 billion at the end of June this year and that about half of that would have to be paid back when they reach maturity.

Won Slides

The South Korean won fell against the U.S. dollar after the Bank of Korea made this announcement.

Also, recent heavy net sales of local shares by foreign investors prompted bids for the U.S. currency for repatriation purposes, which dealers expect to continue. The accumulated net selling by foreign investors reached 6.2 trillion won so far this year.

"Dollar bids are strong," a foreign bank dealer said. "All of stock-related buying has yet to appear in the market, and the dollar is likely to find more support."

The domestic currency was quoted at 923.5/4.1 per dollar, compared with the previous closing bid of 922.6.

The won has undergone big swings this week, tracking volatile global markets on worries about a global credit crunch after a crisis in the U.S. subprime mortgage sector.

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