China: Credit, Collateral, and Commodity Prices

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.