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The impact of liquidity risk in the Chinese banking system on the global commodity markets

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  • Jo, Yonghwan
  • Kim, Jihee
  • Santos, Francisco

Abstract

We show that liquidity risk in the Chinese banking system, via the demand of commodities as collateral, affects commodity markets. Investors in China, to circumvent capital controls, import commodities, collateralize them, and use the loan proceeds to invest in domestic banking products. The Chinese banking system plays a crucial role in every step of this process. Thus, liquidity risk in the Chinese banking system may impact the demand of commodities as collateral. We find empirically that the liquidity risk affects excess returns and risk premium in commodity futures in Chinese and global markets. Our findings give new insights into commodity markets by unraveling their risk exposure to the Chinese interbank market due to the financialization of commodities.

Suggested Citation

  • Jo, Yonghwan & Kim, Jihee & Santos, Francisco, 2022. "The impact of liquidity risk in the Chinese banking system on the global commodity markets," Journal of Empirical Finance, Elsevier, vol. 66(C), pages 23-50.
    • Handle: RePEc:eee:empfin:v:66:y:2022:i:c:p:23-50
    DOI: 10.1016/j.jempfin.2021.12.003
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    More about this item

    Keywords

    Financialization of commodities; Liquidity risk; Chinese interbank market; Maturity mismatch; Commodities as collateral; Commodity futures excess returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • F30 - International Economics - - International Finance - - - General
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • Q02 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General - - - Commodity Market

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