Currency Pressure in East Asia and the Pacific 1990-2013 - Research Paper Example

The paper "Currency Pressure in East Asia and the Pacific 1990-2013" is a perfect example of a finance and accounting research paper. The economy of East Asia and the Pacific countries is considered to be one of the most important economies of the world. The reason for its importance in the international financial market is that countries like China, Japan, Hong Kong are proved to be the World’s largest economies (Bloomberg, 2010). It is believed that the countries in East Asia and the Pacific have favorable political environment for industrial growth and commerce.

The economic history of East Asia and the Pacific represents low-cost labor along with abundant natural resources (Worldbank, 2014). The economy of East Asia and the Pacific became the most powerful economy of the world after Japan entered the international financial market during the 19th century as the only industrial giant outside the US and Europe (Zhu, 2009). Despite the significant developments, which could be seen within East Asia, the region had to face the currency crises in 1997. The crises began in Thailand during the month of June 1997.

The problem was initiated with the inappropriate or insufficient reserves i.e. Foreign exchange reserves to stabilize and support the exchange rates. The outflow of short term capital was unanticipated by the economies and such outflows depreciated the exchange rates significantly. The outflow of short term capital also included the non-renewal of loans, which were issued in foreign currency denominations (Lau, 2001). The Crises lead the economies to financial insolvency because during the same period both domestic and foreign debts were revalued along with the increase in interest rates.

The insolvency had multiplier effects because of the high level of leverage i.e. high debt to equity ratio, which resulted in the bank run down and policy failures in East Asia. All the East Asian currencies, except the Chinese Yuan (CNY) and Hong Kong Dollar(HKD), depreciated significantly and could not be recovered at the previous level even after the crises (Lindley, 2014.p-95). Therefore, East Asian economies have to face significant currency pressures to remain in the international trade market.