Is Korea a Preview for China?

According to The Times Online, South Korea may have currency troubles. The Won has plunged 7% against the dollar in the last month, and officials are worried about a flight from the Won.

And here's the interesting part:

Heavy investment by the Korean Government in Fannie, Freddie and other
US-related agency bonds has left a potentially huge liquidity problem - perhaps $50 billion (£27.4 billion) - in the foreign reserve portfolio. Some believe that Seoul might have no ammunition left to prevent a significant flight from the won. Fruitless currency intervention by South Korea - increasingly desperate-looking verbal and financial measures to fight the market trend - cost about $20 billion in July alone.

Where is the savings glut now? The Won is being squeezed by high inflation and a rapidly slowing economy. Worse, foreign reserves are suddenly "illiquid." We may get an answer to what happens later this month:

Moreoever, the situation could worsen dramatically: $6.7 billion of Korean bonds mature this month, potentially creating vast downward pressure on the won if a large part of that sum immediately flees abroad.

Korea’s foreign exchange reserves stand at $247 billion.

In the meantime, the Bank of Korea has decided to raise rates to 5.25%, choosing to strengthen the currency at the expense of weakening the economy. Ouch.

What will happen to Asia when they all try to sell Treasuries, Agencies, etc. at the same time?