from Zero Hedge:
Last June, China’s stock market miracle ended in tears.
The SHCOMP’s inexorable, parabolic ascent was to a large degree facilitated by an explosion of margin debt, the likes of which could not be found in any other major market across the globe. For instance, by the end of June, the outstanding balance of margin transactions as a percentage of the SHCOMP’s free float market cap was nearly 14% compared to just 5.5% for the S&P and less than 1% for the TOPIX.
A dramatic unwind in the half dozen backdoor margin lending channels that had funneled an additional CNY1.5 trillion into equities brought the party to a thunderous end and by late July,the market was off by more than 30% from its peak.
Chinese officials had already begun to panic by mid-month and then, on the 27th, the bottom fell out.
A harrowing bout of late day selling led the SHCOMP to post its worst one-day drop since February of 2007 and its second worst single session decline in history as the market collapsed by 8.5%.
More than two-thirds of stocks in the index traded limit down that day.
At that point, China was out of ideas. It had been nearly three weeks since Beijing announced it would inject capital into China Securities Finance Corp., effectively giving the PBoC a mandate to not only underwrite brokers’ margin lending businesses but in fact to buy A-shares directly, and nothing seemed to be working to arrest the slide.
Indeed, starting on June 27 (by which time the Shenzhen had fallen by more than 20% from its peak) the PBoC unleashed an eye watering array of measures that encompassed everything from an RRR cut to the easing of regulations to state mandated investments by pension funds to verbal interventions in the form of threats against “malicious” shorts. Nothing was working.
At a loss, the PBoC’s New York-based chief representative for the Americas, Song Xiangyan fired off an e-mail on the morning on July 27 to the institution China figured knew the most about propping up markets: the Fed.
Just after 11 a.m. ET, the e-mail appeared in the inbox of senior Fed staffer Steven Kamin. The subject line read as follows: “Your urgent assistance is greatly appreciated!”
“My Governor would like to draw from your good experience,” Song told Kamin, the director of the Fed’s International Finance Division. “Could you please inform us ASAP about the major measures you took at the time?,” Song asked.
Song was referring to what the Fed did to try and allay market fears in the wake of Black Monday when the S&P collapsed 20% on October 19, 1987. Reuters obtained the messages between Song and Kamin via an FOIA request.
“We’ll try to get something to you soon,” Kamin told Song.
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