Beijing comes to aid of eurozone QE drive with sales of German bonds

Beijing comes to aid of eurozone QE drive with sales of German bonds

Eurozone central bankers, struggling to boost a flagging recovery, have received help from Beijing for their ￠1.1tn quantitative easing plan thanks to sales of German government debt by the People’s Bank of China

The PBoC’s reserve management wing, the State Administration of Foreign Exchange, has been selling some of its German government bonds since the ECB began buying them in March, say two sources close to central banks in China and Europe

Safe does not deal directly with eurozone central banks, which purchase bonds from investors via banks’ bond trading desks. But its sales of German bonds are making life easier in the dealing rooms of Europe’s monetary powers, where traders have been handed the difficult task of finding ￠60bn of mostly government debt to buy each month as part of the QE package

Concerns over the whether the Bundesbank, Germany’s central bank, could find enough German bonds to buy have long surrounded the QE programme. The Bundesbank must purchase around ￠10bn of bonds a month — a potentially problematic amount due to low levels of debt issuance by the German state, although ECB officials have repeatedly played down these concerns

The Bundesbank has scoured the world for sellers, according to one person familiar with the matter, including Safe. Under pressure to make a return on its reserves portfolio, Safe has agreed to take advantage of the high prices on offer for low-yielding German bonds

“Chinese sales of German Bunds would certainly facilitate the ECB’s quantitative easing operations, so this is an instance where the interests of the ECB and PBoC are congruent,” said Eswar Prasad, economist at Cornell University and former China division head at the International Monetary Fund. “

Sales by Safe, thought to hold hundreds of billions of euros-worth of European government debt, would also help the ECB should an emerging market slowdown threaten the single currency area’s recovery and force a more aggressive package of monetary easing

Officials in Frankfurt are expected to revamp QE in December in response to the slowdown, pursuing options that include extending their deadline for bond purchases past the current limit of September 2016 or upping their monthly count for bond buying from the current level of ￠60bn