PBOC Asked Fed How It Handled 1987 Stock Crash, Reuters Says

Updated on
  • PBOC representative in New York e-mailed Fed official: report
  • Fed sent synopsis, publicly available information: Reuters

As Chinese stocks plunged in July, an official from the nation’s central bank reached out to the Federal Reserve for information about how it handled the 1987 U.S. equities crash, Reuters reported.

Song Xiangyan, the People’s Bank of China’s New York-based chief representative for the Americas, sent an e-mail to Steven Kamin, director of the international finance division at the Fed board in Washington, to ask how officials handled the stock plunge, Reuters reported, citing messages obtained through a U.S. Freedom of Information Act request.

Kamin responded swiftly to say that the Fed would try to respond soon, then five hours later the PBOC was sent a 259-word summary of the response to Black Monday, according to the news agency. The Fed also sent notes to guide their central bank counterparts through dozens of pages of Fed transcripts, statements and reports attached to the e-mail, according to Reuters.

“It’s very positive that the PBOC turned to the Fed for lessons from U.S. experience with market turmoil,” said David Dollar, a senior fellow at the Brookings Institution in Washington who previously worked for the U.S. Treasury in Beijing. “The 1987 crash is especially interesting because the U.S. avoided a recession.”

Chinese officials devised new policies on the fly last year as they struggled to arrest a 43 percent stock-market slide from June to August. Growth in the world’s second-largest economy slowed to 6.9 percent in 2015, the slowest pace in a quarter century.

The PBOC didn’t respond to a faxed request for comment Monday, and the Fed didn’t immediately respond to a request for a copy of the correspondence.

China’s central bank recently held a joint symposium with the Federal Reserve Bank of New York in Hangzhou, where U.S. and Chinese officials discussed economic developments and traded views on research. PBOC Deputy Governor Chen Yulu said at the gathering that officials are willing to learn from the Fed on how it conducts open market operations.

Shared Documents

Kamin responded by sending attached documents that had long been available on the Fed website, and it’s unclear if they played any role in shaping policy responses at the central bank in Beijing, Reuters said.

“Many books were written about 1987. Would the PBOC people be ignorant of it?” asked Andy Xie, an independent economist who previously worked for the World Bank and Morgan Stanley. “Why 1987? How about 2000 and 2008? It seems fishing for the supporting materials for what they want to do.”

The documents show how the Fed began issuing statements the day after the market crash, pledging to supply markets with plenty of cash so they could function, according to the report. Song told Kamin that the PBOC was interested in details of how the Fed used repurchase agreements to inject cash into the U.S. banking system in 1987, Reuters said.

That shouldn’t be seen as surprising, according to Trinh Nguyen, an economist at Natixis Asia Ltd. in Hong Kong. “This is normal,” she said. “Central banks often ask not just other central banks but also explore options with the private sector, and academic experts, to consider their plan of action.”

It’s reassuring that the PBOC sought input from Fed officials given the longer U.S. experience in dealing with stock-market crashes, said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney.

“It’s a sign of the maturity of the PBOC that they would reach out to a developed country central bank,” Oliver said. “And it’s also comforting to hear that the Fed is happy to provide such assistance in a timely fashion.”

— With assistance by Jeff Kearns

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