Stock markets from New York to Tokyo tumbled late last year, in the worst stock market crisis in a decade. Prices on the Hong Kong stock market fell 30 percent in four days, and other stock market indexes in Asia lost as much as half of their value. Smaller stock markets, including those in Tel Aviv, Mexico City, Moscow, and S‹o Paolo, were particularly hard hit, with double-digit losses. In New York, London, Tokyo, and Paris prices declined 8-13 percent. Traders around the world watched the markets with "panic and fear," according to one securities trader.

The declines were triggered by economic conditions in Asia. Last July Thailand devalued its currency, reducing the number of bahts exchanged per unit of foreign currency. The devaluation caused the Thai stock market to plummet. The Philippines, Malaysia, and Indonesia soon followed suit, setting off a chain reaction throughout the rest of the world (see below). All four countries had racked up large deficits, which made it impossible to maintain the value of their currencies. As a result, the countries were forced to devalue.

In October the Hong Kong stock market began to show serious signs of weakness, as investors began to worry about the stability of the yuan.

Hong Kong's currency has long been "pegged" to the U.S. dollar, meaning that the rate at which dollars could be exchanged for yuan varied only within a narrow band. Worried that China would not be able to maintain the peg as other Asian countries devalued their currencies, investors sold Chinese currency. The effect was a stock market crash that pushed prices on the Hang Seng index down from 16,000 points last summer to 9,000 points last October. The declines were the worst in Hong Kong since the 1980s.

The drop in the Hong Kong stock market need not have affected markets in the United States, according to experts, who believe the impact was merely psychological. Fundamental conditions in the United States remain solid, with strong growth, modest inflation, and a declining budget deficit. But the crisis in Asia seemed to make investors feel uncertain, causing the New York Stock Exchange to plunge in October (see page 2).

Questions

1. What chain of events caused stock markets throughout the world to decline last year? Answer
   
2. How far did stock market prices fall? Answer

Graphic

1. Stock Market Tumble