Impact of China on World Commodity Prices and Commodity Exporters

Abstract

We study the effect of a domestic shock in China on the real economy and financial markets of a commodity exporting country. We estimate a dynamic factor model using Bayesian methods to identify a China factor and a global factor using monthly macroeconomic data from China and rest of the world. We, then, assess implications of the China factor on global commodity prices and macroeconomy of a commodity exporting nation in a reduced form Bayesian VAR. A negative China shock causes fall in global commodity prices leading to output loss and stock market fall in these countries. China shock affects output of only a subset of countries in our sample compared to US shock, which affects all countries. Stock markets of commodity dependent countries respond strongly and more quickly to China shock than to US shock. China shock also has more persistent effect on commodity prices than US shock.

Keywords: China; Commodities, Bayesian VAR, Dynamic Factor Model, Emerging Market Economies

JEL Classification: F62, Q02, C38