China's PBOC asked Fed how it handled '87 crash

The People's Bank of China in Beijing. An official from the central bank e-mailed the US Fed on July 27 for assistance and a representative also messaged a senior Fed staff member, pointed to the day's 8.5 per cent drop in Chinese stocks and said "my
The People's Bank of China in Beijing. An official from the central bank e-mailed the US Fed on July 27 for assistance and a representative also messaged a senior Fed staff member, pointed to the day's 8.5 per cent drop in Chinese stocks and said "my governor would like to draw from your good experience".PHOTO: REUTERS

WASHINGTON • Confronted with a plunge in its stock markets last year, China's central bank swiftly reached out to the US Federal Reserve, asking it to share its play book for dealing with Wall Street's Black Monday crash of 1987.

The July 27 e-mail from the People's Bank of China (PBOC) came with the subject line: "Your urgent assistance is greatly appreciated!" The plunge in the Shanghai Composite Index on the day was the biggest one-day fall since 2007 and, by then, the market had lost nearly a third of its value over six weeks.

In a message to a senior Fed staff member, the PBOC's New York-based chief representative for the Americas, Mr Song Xiangyan, pointed to the day's 8.5 per cent drop in Chinese stocks and said "my governor would like to draw from your good experience".

The messages, which Reuters obtained through an Freedom of Information Act request, show how alarmed Beijing has become over the deepening financial turmoil and offer a rare insight into one of the least understood central banks.

It is not known whether the PBOC had contacted the Fed to deal with previous incidents of market turmoil. The Chinese central bank and the Fed had no comment for Reuters. The exchanges also show that while the two banks have a collegial relationship, they might not share secrets even during a crisis. "Could you please inform us ASAP about the major measures you took at the time," Mr Song asked the director of the Fed's International Finance Division, Mr Steven Kamin, in the e-mail.

The message registered in Mr Kamin's account just after 11 am in Washington. Mr Kamin quickly replied from his Blackberry: "We'll try to get you something soon."

What followed five hours later was a 259-word summary of how the Fed worked to calm markets and prevent a recession after the S&P 500 stock index tumbled 20 per cent on Oct 19, 1987.

The Chinese market crash triggered steep declines across global markets. By the time Mr Song wrote to Mr Kamin, China had spent a month fighting a stock market slide. He told Mr Kamin the PBOC was particularly interested in the details of the Fed's use of repurchase agreements to temporarily inject cash into the US banking system in 1987. Within a few hours, the Fed sent China's central bank a trove of publicly available documents detailing the US central bank's actions. In 1987, the Fed contacted banks directly and encouraged them to meet "legitimate funding needs" of their customers, said Mr Kamin's e-mail to Mr Song.

Mr Kamin also sent notes to guide PBOC officials through the many dozens of pages of Fed transcripts, statements and reports attached to the e-mail. All had long been available on the Fed's website and it is unclear if they played a role in shaping Beijing's actions.

Fed policymakers started a two-day policy meeting the next day and took note of China's stock sell-off, said the meeting's minutes. Several said a Chinese economic slowdown could weigh on America.

In addition to its pledges and cajoling, the US central bank in 1987 eased collateral restrictions on Wall Street and tried to calm markets by intervening in trading earlier than normal. The US economy continued to grow, eventually entering recession in 1990.

The central bank in Beijing does not have as free a hand to conduct policy as does the Fed, which answers to the US Congress but operates independently from the administration.

REUTERS

A version of this article appeared in the print edition of The Straits Times on March 22, 2016, with the headline 'China's PBOC asked Fed how it handled '87 crash'. Print Edition | Subscribe