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Singapore. South Korea has rebounded from last year’s financial crisis faster than some of its neighbors, thanks in part to a weaker won, giving Asia a valid and powerful reason to stick to its export-oriented growth strategy.

The highly leveraged and open South Korean economy was easily the worst-affected Asian country in 2008 when the global credit crisis triggered heavy capital flight. The won plunged 41.4 percent over 15 months to 11-year lows in March this year.

The turnaround from the depths of that crisis has been impressive. Powered by a pickup in exports, the economy expanded at its fastest pace in five years in the second quarter.

China’s yuan revaluation in 2005 and Asia’s rapid growth in those years had led at least some academics to believe Asia was moving faster towards floating currencies and freer markets.

South Korea’s experience flies against that argument, proving that it is worthwhile for Asia’s cyclical economies to let their currencies tumble in the face of financial and economic turbulence.

“It was wrong for people to assume that Asia would give up a growth model that has clearly and demonstrably delivered the goods,” said Tim Condon, ING’s chief Asian economist.

“Yes, it imparts a little bit of volatility. But you generate a lot of jobs and grow rapidly using that model. Governments don’t give these things up.”

South Korea is primed to be the first in Asia to raise interest rates, with some analysts predicting a V-shaped economic recovery despite persistent worries about weak global consumer demand and the waning impact of government stimulus.

If it can be sustained, the rebound could spawn misgivings among its neighbors who poured billions of dollars into the market last year to prevent their currencies from collapsing.

Indeed, there has been growing evidence in the past couple of months that central banks in the region have increased efforts to curtail appreciation in their currencies. And Western economists are starting to see merits in Asia’s much-maligned growth strategy.

The evidence stacks up heavily in favor of a continuation of this weak-currency policy, one that has fueled much debate on global trade imbalances and profligate US consumers.

Thanks to a weak won, South Korea’s trade balance in local currency swung to a huge 4.8 trillion won ($3.8 billion) surplus in July 2009, from a deficit a year earlier.

In local currency, exports rose 5.6 percent in the first half of 2009 from the year-earlier period, while Taiwan’s exports fell 29 percent and Singapore’s fell 17 percent.

It is no coincidence that South Korean steel maker Posco is seeing huge demand and expects a four-fold expansion in earnings, or that Hyundai Motor is gaining a bigger share of the global automobile market.

Although the won has appreciated 29 percent since March, it is still one of Asia’s most undervalued currencies in trade-weighted terms.

South Korea’s terms of trade — the ratio of export and import prices — rose to 124.1 in June from 85.2 in December which, in basic terms, means South Korea was getting 124 units of imports for every 100 units it exported.

Over the same period, Singapore saw its terms of trade deteriorate to 95 from 98.7, Thailand’s was barely changed at around 100 and Taiwan’s fell from 92.4 to 86.2.

It is small wonder then that other Asian foreign exchange authorities have joined Korea in buying US dollars to curb strength in their currencies.

The Bank of Korea was spotted purchasing dollars this month and late last month, traders said, when the won hit its highest level in about 10 months against the dollar and was about to rise through the 1,200-per-dollar mark.

The authorities did not push down the currency but actively bought dollars to prevent it from breaking through the level, traders said. The won has been trading between 1,213 and 1,265 against the US dollar this month.

Taiwan and India, too, saw big jumps in their currency reserves in June and July. On the whole, Asia’s holdings of foreign exchange reserves, excluding China’s, rose by $33.8 billion in July to $2.58 trillion.

Analysts at HSBC said such amounts of intervention were at par with levels seen before the credit crisis.

“Perhaps the first key takeaway from recent action is that regional policy makers do not appear to be showing any conceptual shift in the traditional caution toward currency strength. If anything, the crisis has likely reinforced preferences for managed exchange rates,” HSBC said in a report.

Reuters