China: Credit, Collateral, and Commodity Prices

HKIMR Working Paper No.27/2015

38 Pages Posted: 30 Dec 2015 Last revised: 9 Jan 2016

See all articles by Shaun K. Roache

Shaun K. Roache

International Monetary Fund (IMF)

Marina Rousset

International Monetary Fund (IMF) - IMF Institute

Date Written: December 30, 2015

Abstract

We review how China has become a dominant influence in global commodity markets due to the economy’s size and commodity intensity. We then focus on the emergence of China’s credit market as a new influence on commodity prices using a vector autoregression model and recursive identification. We find that a 1 percentage point (ppt) surprise increase in China’s bank lending results in statistically significant price increases of 10-12 percent for some base metals, including copper. This contrasts with a 1 ppt shock to China’s industrial production which leads to a statistically significant change of 7-9 percent of aluminum, copper, and crude oil. We suggest that one reason for the large influence of China’s credit aggregates may be the important role that some commodities play as collateral for lending in a financial system still bedeviled by information asymmetries, particularly for private sector borrowers.

Suggested Citation

Roache, Shaun K. and Rousset, Marina, China: Credit, Collateral, and Commodity Prices (December 30, 2015). HKIMR Working Paper No.27/2015, Available at SSRN: https://ssrn.com/abstract=2709295 or http://dx.doi.org/10.2139/ssrn.2709295

Shaun K. Roache (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Marina Rousset

International Monetary Fund (IMF) - IMF Institute ( email )

700 19 th Street NW
Washington, DC 20431
United States

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