China central bank to Fed: A little help, please?
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[March 21, 2016]
By Jason Lange
WASHINGTON (Reuters) - Confronted with a
plunge in its stock markets last year, China's central bank swiftly
reached out to the U.S. Federal Reserve, asking it to share its play
book for dealing with Wall Street's "Black Monday" crash of 1987.
The request came in a July 27 email from a People's Bank of China
official with a subject line: "Your urgent assistance is greatly
In a message to a senior Fed staffer, the PBOC's New York-based
chief representative for the Americas, Song Xiangyan, pointed to the
day's 8.5 percent drop in Chinese stocks and said "my Governor would
like to draw from your good experience."
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 when reached by Reuters.
In a Reuters analysis last year, Fed insiders, former Fed employees
and economists said that there was no official hotline between the
PBOC and the Fed and that the Chinese were often reluctant to engage
at international meetings.
The Chinese market crash triggered steep declines across global
financial markets and within a few hours the Fed sent China's
central bank a trove of publicly-available documents detailing the
U.S. central bank's actions in 1987.
Fed policymakers started a two-day policy meeting the next day and
took note of China’s stock sell-off, according the meeting’s
minutes. Several said a Chinese economic slowdown could weigh on
Financial market contagion from China was one of the reasons cited
by the Fed in September when it put off a rate hike that many
analysts had expected, a sign of how important China has become both
as an industrial powerhouse and as a financial market.
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 major central banks.
The exchanges also show that while the two central banks have a
collegial relationship, they might not share secrets even during a
"Could you please inform us ASAP about the major measures you took
at the time," Song asked the director of the Fed's International
Finance Division, Steven Kamin in the July 27 email.
The message registered in Kamin's account just after 11 a.m. in
Washington. 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 percent on Oct. 19, 1987.
Kamin also sent notes to guide PBOC officials through the many
dozens of pages of Fed transcripts, statements and reports that were
attached to the email.
All of the attached documents had long been available on the Fed's
website and it is unclear if they played a role in shaping Beijing's
Kamin's documents detail how the Fed began issuing statements the
day after the market crash, known as Black Monday, pledging to
supply markets with plenty of cash so they could function.
By the time Song wrote to Kamin, China had spent a month fighting a
stock market slide and many of the actions taken by the PBOC and
other Chinese authorities shared the contours of the Fed's 1987 game
The July 27 plunge in the Shanghai Composite Index was the biggest
one-day fall since 2007 and by then the market had lost nearly a
third of its value over six weeks.
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China's central bank had already cut interest rates on June 27 in
similar fashion to the Fed's swift move to ease short-term rates in
Song told Kamin the PBOC was particularly interested in the details
of the Fed's use of repurchase agreements to temporarily inject cash
into the U.S. banking system in 1987.
The PBOC had increased cash injections in June and ramped up
repurchase agreements in August as stocks continued to slide. The
PBOC also eased policy on Aug. 11 by allowing a 2 percent
devaluation in the yuan currency.
As Song and Kamin exchanged messages on July 27 and 28, other
Chinese authorities were busy trying to contain the crash.
China's securities regulator said on July 27 it was prepared to buy
shares to stabilize the stock market and that authorities would deal
severely with anyone making "malicious" bets that stocks would fall.
In 1987, the Fed contacted banks directly and encouraged them to
meet "legitimate funding needs" of their customers, according to
Kamin's email to Song.
In addition to its pledges and cajoling, the U.S. central bank in
1987 eased collateral restrictions on Wall Street and tried to calm
markets by intervening in trading earlier than normal. The U.S.
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 U.S. Congress but
operates independently from the administration.
The PBOC governor Zhou Xiaochuan implements policies ultimately
decided by political leaders in Beijing and lacks the authority to
lead debate or shed light on decision-making.
China's vice finance minister told Reuters last year Chinese
supervisors needed to learn from countries like the United States.
Premier Li Keqiang said last month China's regulators did not
respond sufficiently but China had fended off systemic risks.
U.S. central bankers say their relative transparency helps their
effectiveness and legitimacy, but open records laws also make Fed
officials cautious about their communications, much of which must be
made public when requested. Fed Vice Chairman Stanley Fischer has
said transparency makes it harder for policymakers to have informal
Kamin pointed out in his email that everything he was sending was
"I hope this is helpful," he said.
(Reporting by Jason Lange in Washington; Additional reporting by
Kevin Yao in Beijing; Editing by Tomasz Janowski)
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