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China Asked The Fed For Advice on a Stock Market Crash

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 appreciated!"

People walk past PBOC headquarters in Beijing
People walk past the headquarters of the People's Bank of China (PBOC), the central bank, as two paramilitary police officials patrol around it in Beijing November 20, 2013. REUTERS/Jason Lee

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 America.

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 crisis.

"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 actions.

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 plan. 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 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.

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 discussions.

Kamin pointed out in his email that everything he was sending was publicly available.

"I hope this is helpful," he said.